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Fenton-OrsquoCreevy Mark Soane Emma Nicholson Nigel and Willman Paul (2011) Thinking feeling anddeciding the influence of emotions on the decision making and performance of traders Journal of OrganizationalBehavior 32(8) pp 1044ndash1061

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Version Accepted Manuscript

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1

THINKING FEELING AND DECIDING THE INFLUENCE OF EMOTIONS ON THE

DECISION MAKING AND PERFORMANCE OF TRADERS

MARK FENTON-OrsquoCREEVY

Open University Business School

Walton Hall

Milton Keynes MK7 6AA UK

Tel +441908 655888

email mpfenton-ocreevyopenacuk

EMMA SOANE

Kingston Business School

Kingston University

Kingston Hill

Kingston Upon Thames

Surrey KT2 7LB UK

email ESoanekingstonacuk

NIGEL NICHOLSON

London Business School

Regents Park

London NW1 4SA UK

email nnicholsonlondonedu

PAUL WILLMAN

Department of Management

London School of Economics

London WC2A 2AE UK

email pwillmanlseacuk

We gratefully acknowledge the support of the ESRC (grant no L211252056) for the collection of

the original data for this study The work of the first author on data analysis and theoretical

development was funded in part by the European Commission under the 7th Framework

Programme Grant Nordm231830 We gratefully acknowledge the comments of three anonymous

reviewers and the journal editor Kerrie Unsworth which helped us significantly improve the

paper

2

ABSTRACT

We report on a qualitative investigation of the influence of emotions on the decision-making of

traders in four City of London investment banks a setting where work has been predominantly

theorized as dominated by rational analysis We conclude that emotions and their regulation play

a central role in traderslsquo decision-making We find differences between high and low performing

traders in how they engage with their intuitions and that different strategies for emotion

regulation have material consequences for trader behavior and performance Traders deploying

antecedent-focused emotional regulation strategies achieve a performance advantage over those

employing primarily response-focused strategies We argue that in particular response-focused

approaches incur a performance penalty in part because of the reduced opportunity to combine

analysis with the use of affective cues in making intuitive judgments We discuss the

implications for our understanding of emotion and decision making and for traderslsquo practice

3

INTRODUCTION

In this paper we describe a qualitative study which develops our understanding of the role

of emotion intuition and emotion regulation in financial decision-making The study addresses

three research questions First it tests whether emotions play a significant role in decision-

making in financial trading which has been characterized as rational in the classical economic

sense A second question concerns the nature of traderslsquo own understanding of the role played by

emotion and affectively cued intuitions in their decision making performance A third question is

whether there is a link between traderslsquo emotion regulation strategies engagement with

affectively cued intuitions and decision making performance

Neo-classical financial economics has been a prime influence on research into markets

and market behavior Traders within financial markets have been understood as profit

maximizers who act on price information which summarizes all available knowledge about asset

values (Fama 1991 1998) Financial markets are designed to be transparent and have low

transaction costs such that profit opportunities are only fleetingly available and market

imperfections are eradicated (MacKenzie 2006) Within this paradigm there are strong

assumptions about investor rationality and the nature of investor preferences

Understanding of markets and market behavior has been developed by the advent of

behavioral finance (De Bondt Palm amp Wolff 2004 Thaler 1993) which has drawn upon the

insights of cognitive psychology to incorporate the ―irrational elements of cognitive biases and

collective sentiments such as herding behavior into models of financial decision making

Behavioral finance has had some success in modeling investor behavior and explaining well

known deviations of market behavior from the predictions of the efficient markets hypothesis ndash a

mainstay of the neo-classical paradigm (Fama 1991) However within this field of study the

main role accorded to emotions to date is that they are portrayed as interfering with rational

4

cognition or they are seen as outcomes of the decision process affecting anticipated utility In

neither case are they acknowledged as integral and primary in their effects on choice and action

(eg Shefrin 2000 Peterson 2007) The trader practitioner literature though is full of references

to emotion and market sentimentlsquo For example -

ldquoTrading is emotion It is mass psychology greed and fearrdquo (Marcus in Schwager

1993 49)

Despite renewed interest in emotions and emotion regulation in the workplace applied

empirical work in field settings has been limited (Seo Barrett amp Bartunek 2004) and has largely

focused on the relatively narrow domain of emotional labor or emotions have been

decontextualized In this paper we examine the impact of traderslsquo emotions on their perceptions

behavior and performance in financial markets using interview data from 118 professional traders

and 10 senior managers in investment banks We consider traderslsquo understanding of the role of

emotion in their trading practice and seek to shed light on the ways in which traders experience

and regulate work-related emotions and how these processes change with increased expertise We

also explore the relationship between traderslsquo experience of emotion emotion regulation and

expert performance Our goal is to build a bridge between experimental and neuroscience

research into the role of emotions and rich accounts of traderslsquo lived experience of emotion in

their thinking deciding and acting (Sayer 1997)

The structure of this paper is as follows First we review relevant literature on emotions

and cognitions in decision-making and on emotion regulation including studies of traders and

investors Second we use qualitative data from interviews with traders and their managers to

address our research questions and discuss the data in relation to the literature We consider and

codify traderslsquo accounts of the role of emotion in their work and explore the relationship between

5

emotion regulation approach to engaging with intuition and trader performance Finally we

consider the theoretical and practical implications of our findings

THEORETICAL ORIENTATION

The Relationship between Emotion and Cognition

Cognition as a field of study within psychology emerged in the middle of the 20th

century

as a reaction to the dominance of behaviorism (Miller 2003) A guiding metaphor for much

cognitive psychology has been the brain-as-computer an analogy which leaves little place for

emotion except as a disturbance of optimal cognitive functioning or as a signaling system that

accompanies action and experience Thinking has been understood as quite apart from feeling In

a major review of research into the relationships between emotions and cognition Phelps (2006)

concludes that understanding the role and significance of emotion is critical to understanding

cognition It has become clear that cognition is not only affected by emotion but that emotion is

central to our cognitive functioning Current models have converged on dual processing theories

of cognition (Bechara et al 1997 Buck 1999) which suggest that decision-making is

underpinned by two parallel processes System one is rapid pattern recognition activates

emotionally weighted biases which in turn activate stored behavioral repertoires This process is

non-conscious with important parallels to perceptual processes and linked to intuitive decision

making (Dane amp Pratt 2007 Epstein et al 1996) System two the slower process involves

conscious deliberation and analysis (the executive function) facts are represented and weighed

options are generated and compared potential outcomes are modeled and learned reasoning

strategies are applied

Models of the dual process approach consider these two decision processes not as

completely separate but as interacting Conscious analysis of a situation can affect emotional

6

appraisal and immediate affective response may be one input among others into deliberation

Most of our behaviors (and associated decisions) happen in an automatic fashion with minimal

active participation by the conscious self unless we are confronted with a novel situation (Bargh

et al 1996) or uncertainty (Tiedens amp Linton 2001) The brainlsquos capacity for conscious

deliberation is limited and can be depleted much as a muscle can become exhausted (Baumeister

et al 1998 Muraven amp Baumeister 2000) Thus particularly in fast-paced and demanding

environments conscious deliberation is reserved for tasks that are accorded the highest priority

Emotions have an important role as cues to decision making Finucane et al (2000) suggest that

emotions act as a heuristic That is emotions provide an accessible summary of experience

cognitions and memories One might expect that traders given the volume of decision demands

will engage in a great deal of automatic decision making and use emotional cues There is some

empirical evidence supporting this view Lo and Repin (2002) carried out a small-scale study of

the physiological responses (blood pressure and skin conductance) of professional traders (N=10)

to actual market events They found emotional arousal to be a significant factor in the real-time

financial decision-making of both novice and experienced traders Less experienced traders

showed stronger arousal in response to short-term market fluctuations than more experienced

traders indicating that emotions are particularly important in relatively novel situations that

require cognitive effort

Emotion and Decision-Making Performance

There is evidence that emotions affect decision-making performance First there is a

range of evidence that emotions can induce biases in decision-making Emotions can skew

information retrieval For example there is evidence that it is most easy to recall experiences that

are congruent with current emotional state (Bower 1981 1991 Mayer et al 1990) Emotions

also directly bias decision-making for example fear and anger have significant (and opposite)

7

effects on risk perceptions (Lerner amp Keltner 2001 Lerner et al 2004) Additionally emotions

bias the value attached to outcomes For example intense negative emotions enhance valuation of

short-term outcomes regardless of negative long term consequences (Gray 1999) Overall

positive affect tends to be associated with optimistic decision making and negative affect with

pessimistic choices (Isen et al 1978 Johnson amp Tversky 1983 Kavanagh amp Bower 1985

Mayer amp Hanson 1995 Schwarz amp Clore 1983 Wright amp Bower 1992)

Emotions also have a role in risk-related decision making A laboratory study of financial

decision-making under risk found that low levels of emotional experience led to higher levels of

performance through greater risk neutrality due to a more constant association between objective

gain and subjective value (Schunk amp Betsch 2006) Lo et al (2005) found clear associations

between day-traderslsquo emotions their decision making and performance There was evidence that

positive decision-making outcomes as assessed by profits and losses were associated positively

with pleasant affect (eg content) and negative outcomes with unpleasant affect (eg bored)

Furthermore investors who experienced more intense positive and negative emotional reactions

to gain and loss were poorer performers than those with more attenuated emotional responses

The authors suggested that rapid emotional decision making is unsuited to the complex

information-rich environment of trading The trading practitioner literature also tends to promote

the view that emotions are detrimental to decision making exemplified in the following quotation

from highly rated trader Bruce Kovner ―Whenever a trader says bdquoI wish‟ or bdquoI hope‟ he is

engaging in a destructive way of thinking because it takes away from the diagnostic thought

process (Schwager 1993 82) In contrast Seo and Barrett (2007) carried out a study of

investment club members using an internet-based investment simulation accompanied by

emotional-state surveys They found that individuals who experienced more intense emotions

achieved higher decision-making performance

8

Thus while there is ample evidence that emotions affect decision-making performance

including for traders the evidence on the nature of that impact is mixed While there is evidence

for the biasing effect of emotions there is also evidence that we rely on emotional cues in rapid

automatic decision-making and they confer a tangible advantage to everyday decision-making

(Bechara et al 1997)

Research into the nature of expertise has tended to characterize intuition (a form of

experientially-based pattern recognition linked to the affectively cued system 1 (Dane and Pratt

2007)) as integral to expert performance ndasheg Dreyfus amp Dreyfus 2005 Klein et al 1986

Stokes et al 1997) Dane and Pratt (2007) note an important distinction between on the one

hand the decision heuristics literature which mainly supports a view of intuitive decision-

making as inferior to more rational models and on the other the literature on expertise which

emphasizes the central role of intuition in expert performance A crucial difference between these

literatures is the different emphasis placed on research method and context Research on decision

heuristics is often context free and relies heavily on experiments using subjects who are

inexperienced in the tasks studied There is also evidence that some of the key cognitive biases

identified as maladaptive products of heuristic reasoning in experimental settings either do not

occur or lead to better outcomes when decision-making is studied in the field or studied using

approaches that approximate real life contexts (Todd amp Gigerenzer 2007) The expertise

literature in contrast places great emphasis on domain specific knowledge and skills on the

development of complex cognitive schema that enable rapid associative pattern recognition and

on the activation of extensive and complex behavioral repertoires Dane and Pratt (2007) argue

that in consequence intuition will be more likely to function as an effective component of

decision-making in performance domains that require significant experience and complex domain

relevant schema a description which fits the world of financial trading

9

In summary the emotions literature gives considerable support to the idea that emotions

have multiple critical impacts on decision-making Some of these can be characterized as bias

with the potential to be detrimental to decision-making performance However it is also apparent

that there is an alternative position it is not emotions per se that are detrimental to decision-

making performance but rather that expertise and the regulation of emotions determine whether

emotions have positive or negative impacts on decision performance

Emotion Regulation

Accounts of emotions as bias focus primarily on the potential for emotions to have a

negative influence on performance By contrast accounts of emotions as information focus

primarily on the valuable role of emotions in encapsulating prior relevant experience In

principle these two perspectives may not incompatible and effective emotion regulation may

have a role in reducing the biasing effect of emotion while retaining sensitivity to the information

which emotions may carry It thus seems likely that the regulation of emotion may play an

important role in emotion performance effects Gross (2002 Gross amp Thompson 2007)

distinguishes a series of different stages in emotion episodes and five associated emotion

regulation strategies The model suggests that people both choose and modify situations

Situations require attention and appraisal which leads to an emotional response

Attempts to manage emotions may focus on any of the stages indicated in the above

model One approach to managing emotions is to select avoid or modify situations Other

approaches include focusing attention on emotionally salient elements of a situation and where

emotional responses might be difficult to cope with reframing situations to modify the emotional

response It is also possible to avoid emotional responses by refocusing attention elsewhere Each

of these strategies could lead to responses being modulated or suppressed Gross and Thompson

(2007 16) make clear that this model of emotions and their regulation is something of a

10

simplification However the model usefully illustrates the central role of emotion regulation in

decision-making

In addition to theoretical modeling there is empirical evidence for a relationship between

strategies for emotion regulation and a range of important outcomes Recent research has paid

particular attention to the difference in outcomes between antecedent-focused emotion regulation

strategies which seek to change emotions before emotion responses have become fully activated

and response-focused regulation strategies which modify behavior and emotion expression once

the emotion response is underway Emotion regulation strategies have been shown to have

differential effects on outcomes including cognitive performance health and qualities of social

interaction (Gross and Thompson 2007) In the domain of work performance much attention has

focused on the emotional labor required by customer service interactions Here emotion

regulation has been characterized as a process of deep and surface acting Surface acting is the

faking of emotion display to accord with organization display rules Deep acting involves

modifying inner feelings Grandey (2000) considers emotional labor as a subset of emotion

regulation and equates antecedent-focused and response-focused regulation with deep and surface

acting respectively In a study of front-line service workers Grandey (2003) found antecedent-

focused emotion regulation was associated with greater effectiveness in relating to customers in a

warm friendly manner while response-focused emotion regulation was associated with emotional

exhaustion and greater tendency to break character and reveal negative emotions in a service

encounter This result supports Grosslsquos earlier work (2002) There is also some evidence on

emotion regulation and financial decision-making Seo and Barret (2007) found that investors

who were better able to identify and discriminate among their current feelings achieved superior

decision-making performance They argued that this relationship was mediated by effective

regulation of the influence of feelings on their decision-making

11

In the present study we go beyond the study of emotion regulation in a context of work

performance that depends primarily on social interaction In contrast to emotional labor studies

which focus on the context of interpersonal interaction most trading nowadays (and in all cases

we studied) is conducted electronically via computer or through highly abbreviated and

formalized electronic messages with counterparties Rather than depending on appropriate

emotion display in the context of customer interaction or negotiating with counterparties trader

performance depends on selecting optimal trading strategies in the face of complex cognitive

demands and the need to process significant amounts of information with uncertain relevance

(Knorr-Cetina amp Bruegger 2002) We now turn to the present study

THE STUDY AND METHODS

The data reported in this paper were collected as part of a large multifaceted study of the

role and behavior of traders working in investment banks For this paper we have returned to this

data corpus to examine the considerable amount that traders told us about their work and

emotion an aspect touched on only superficially in previous analysis of this data (see Fenton-

OCreevy Nicholson Soane and Willman 2005 for an extended account of the study)

Participants

Participants were sampled from four leading investment banks with offices in the City of

London Three banks were American and one was European Managers in each organization were

asked to select a representative sample of traders from a range of markets trading in stocks

bonds and derivatives The mean age of participants was 3281 years (sd = 491) There was

variation in traderslsquo experience with overall tenure (including time with previous employers) in a

range from 6 months to 30 years and a mean job tenure of 780 years (sd = 558) The trader

sample comprised 116 men (983) and 2 women (17) The participants were traders in

equities bonds and derivatives most engaged in either market making or proprietary trading or

12

both We gathered information on individual trader characteristics and performance and carried

out semi-structured interviews with each trader and with a further 10 senior managers Where

traders were also managers we interviewed them twice once as a trader and once as a manager

Data

Qualitative data Interviews lasted between 30 and 90 minutes They were recorded and

transcribed in full The interviews ranged over multiple aspects of the traderslsquo roles and work

The data set for this study consisted of the portions of the interviews relevant to the role of

feelings in traderslsquo work and decision making Traders were asked to describe the range of

emotions they experienced during trading Follow-up questions encouraged them to explore the

long-term and short-term effects of emotions on their decision making and trading strategy the

role of intuition in their trading and the impact of emotions on performance Managers were

asked to describe how they evaluated and managed trader performance Again this often

produced talk about traderslsquo feelings and how they were managed

Performance data Hard performance data for traders are difficult to obtain Measures

such as value at risk trading outcomes and profit and loss are highly confidential in this setting

and were not available to us so we used total remuneration as our measure of trader performance

We felt this to be a reasonable proxy for decision-performance since a high proportion of total

remuneration is a variable annual performance linked bonus and the non-bonus elements tend to

reflect longer term financial performance in this very performance oriented sector We have

treated this variable as an indicator of expertise which Ericsson (2006) defines as reliably

superior performancelsquo Traders were asked to state their income including bonus in terms of

four categories (1 pound50000 - pound99999 (N = 4) 2 pound100000 to pound299999 (N = 41) 3 pound300000-

pound499999 (N = 34) 4 more than pound500000(N = 38) One trader declined to provide this

information

13

Analysis

The raw data were the full transcripts of all interviews We used a thematic analysis

approach which we judged to be particularly well suited to the present study As Braun and

Clarke (2006 78) note thematic analysis does not rest on a single epistemic position but can

span both realist and constructivist approaches We take the position that emotions have both a

measurable biological reality and exist in the realm of socially constructed personal experience in

which emotions have personal and social meaning

Data were open-coded by each author separately then in discussion using the NVIVO

program Common statements were identified and used as the basis for a first set of coding

categories which were subsequently refined and consolidated Coding categories were thus both

emergent from the interviews and drew on constructs identified in the literature (eg approaches

to emotion regulation) relevant to emerging themes Thus coding was both theoretical and

inductive As we analyzed the data and drew tentative conclusions we explicitly sought

disconfirming evidence to test the robustness of our insights In a later stage of analysis we

partitioned the sample into groups of low (lt5 years n=25) medium (5 to 10 years n=48) and

high experience (gt10 years N=45) and into groups of low (remunerationlt pound300k N=45) medium

(pound300k- pound500k N=34) and high expertise (gt pound500k N=38) We compare interview responses of

three specific groups inexperienced low paid traders (N=18) highly experienced but low paid

traders (N=15) and high paid traders (N=38) The remainder of the sample were medium

experience and pay There were no low experience high pay traders We chose the three

comparison groups to provide maximal contrast in differentiating the characteristics associated

with different levels of experience and expertise respectively

14

In Table 1 we summarize our key findings and the nature of the evidence for each finding

In the final column we note our sense of the strength of the evidence for each finding This

represents a qualitative conclusion arrived at though discussion between the authors and drawing

on quantity consistency importance and clarity of supporting data and existence of any

disconfirming evidence In the next section of the paper we discuss these findings and the

evidence for them in more detail Direct quotes are verbatim accompanied by the case number of

the respondent and their classification in terms of experience and pay level

TABLE 1 ABOUT HERE

TRADERSrsquo UNDERSTANDINGS OF EMOTION IN THEIR TRADING PRACTICE

Emotional experience and regulation

For many traders especially the less experienced trading is marked by significant and

persistent emotional responses to successes and setbacks It is relevant to note the distinction

between mood and emotion since both were relevant to traders Mood can be understood as a

relatively diffuse emotional climate which persists over time and not anchored to specific

situations or cognitions In contrast emotions typically have specific objects and give rise to

behavioral response tendencies relevant to those objects (Totterdell Briner et al 1996)

ldquoWhen you lose money you could sit down and cry Anybody who says you couldn‟t

isn‟t being honest with you Of course when it‟s good it‟s fantastic The highs and

lows of a trader‟s life are euphoria or absolute dismayrdquo 106 high experience

medium pay

While these emotional responses would often be triggered by specific events or series of

events in many cases the impact on mood would persist for significant periods with

consequences for subsequent trading behavior For example one manager described a trader

15

working for him as ―having been in the wilderness his confidence totally shattered for about

two years before slowly recovering from a string of losses Many talked about needing weeks or

even months to recover from the impact of major losses especially early in their careers Others

talked about the dangers of false confidence or euphoria which could persist for some time after a

big win

ldquoPeople get a bit arrogant when they have good times but this can be dangerous

because then they stop thinking as muchrdquo 18 medium experience medium pay

ldquoI tend to feel more cautious when losing moneyhellipIf I am having a down month I‟ll

look at trades which I would do if I was having a good month and say I don‟t like it

enough to take the risk on it I become more selective more risk averse and to do a

trade I need to see more than one reason why a trade will work and then might put it

on but not in a huge size When making money I can be more slack 29 high

experience high pay

However our data also suggest emotion regulation is critical to moderating the impact of

emotions on traderslsquo decision making Senior traders and trader managers frequently talked about

the way in which they had developed a capacity to regulate their own emotions and trade more

evenly regardless of success and setbacks

ldquoYou learn to be able to deal with emotions It doesn‟t get to me as much There

were situations when I was extremely stressed up and then you feel physically ill and

you really feel on the verge of throwing up But that was a long time ago and doesn‟t

happen so much now You have seen the ups and downs more You have experienced

them and in a way you are probably more prepared for it and you are aware that

every now and then it will happenhellip but it doesn‟t get to you all that much because

you are aware that it will happen 6 medium experience high pay

16

We examined emotion regulation and its relevance to performance further by considering

data from the three comparison groups (based on experience and pay) We noticed some

important differences in the way in which these groups discussed the interaction between

emotion trading and the use of intuition First there seemed to be notable differences in the

strategies employed for emotion regulation which we describe below in the language of the

Gross and Thompson model (2007) When asked directly about emotion traders in the low

experience group typically started by presenting themselves as fairly immune to the impact of

emotion on their trading However as the interview progressed they would often reveal rather

more vulnerability to emotions than they had claimed initially Take for example this trader who

had been trading for a little less than 4 years -

ldquoI‟m bit of a cold fish I don‟t think emotions greatly affect my decision-making If

you are making money you are achieving your objectivehellip

[But later]

hellipWhen you lose money it can be horrendous violent mood swings You don‟t know

what to do when you lose moneyrdquo 38 low experience low pay

There tended to be two responses types when these traders did talk about their emotions

Some in the low experience low pay group did not talk at all about actively managing their

emotions Others talked about removing themselves from situations when their emotions became

a problem (situation modification) or avoiding situations entirely which make them feel bad

(situation selection)

ldquoI think there is a strong emotional element to trading I think that anyone who‟s

doing it properly and has got their head screwed on is doing everything they can

consciously to overrule that and if I feel that I‟m trading emotionally I will walk off

17

the desk have a glass of water walk up and down the street and then come back and

make decisions when I‟m hopefully not emotionalrdquo 43 low experience low pay

Traders in the experienced group more commonly talked about strategies for emotion

regulation However the nature of these strategies tended to vary between the low paid and high

paid groups In the high experience low paid group traders seemed to find it hard to articulate

how they managed their emotions and the emotion regulation strategies they identified were

predominately situation avoidance situation modification and response modulation

ldquoIf you get two or three decisions wrong you find you might not take a risk for a

month until you build up your confidence There‟s definitely a lot of confidence

involvedrdquo 104 high experience low pay

ldquoI try and keep my emotions under tight controlrdquo 105 high experience low pay

There is a marked contrast in the discourse of the high performing traders who often

showed a greater willingness to reflect on their emotion-driven behavior (the two exceptions to

this were traders with whom we had only short interviews with little opportunity for extended

reflection rather than any denial of the role of emotion) Emotion regulation for these traders

tended to focus mainly on how they directed their attention (attentional deployment) and how

they framed experiences of loss and gain (cognitive change)

ldquoBig losses and big gains can swap around fairly quickly and once you understand

that then you stop concentrating on the loss and you start concentrating more on how

to make money back hellip One big trade is not going to make anyone and one big loss

doesn‟t destroy yourdquo 15 high experience high pay

ldquoExperience definitely helps having traded through the crash etc Youve seen

different scenarios and newer people its like oh my god its the end of the world

whereas there is life after death and so I think that type of experience helps It doesnt

18

necessarily help the new situation on what to do but it just helps your judgmentrdquo 55

high experience high pay

There was a notable absence of avoidant behavior in this group Several participants told

stories which implied a significant degree of persistence in the face of negative emotion

ldquoI had one very bad year from which I learned quite a lot I learned that the

overshooting can go on for a very long time it can be very painful you can hit risk

limits hellip I did not want to get out of the trades so kept the trades and then next year

they made more money than they lost I don‟t think I panicked but I was getting calls

from the CEO Reason prevailed in the end Emotionally it was not easy to cope

with There were times when the desk was down close to $100m I lost almost that

much in days I was under a lot of pressure from New York because they did not

understand my positions but in the end we managed to keep the positions and made

money the next year The hardest thing was persuading others that I had a good

traderdquo 14 high experience high pay

This willingness among some of the high performing traders to experience negative

emotion in order to achieve longer term goals is consistent with Labouvie-Vieflsquos (2003)

argument that positive self-development requires not just strategies to optimize positive affect

but also the ability to tolerate tension and negativity to achieve long term goals

However there may be another important reason why response modulation strategies are

maladaptive for traders As we have seen above while poorly regulated emotions carry over to

subsequent trading and risk biasing subsequent trading behavior emotion cues generated by

reactions to information relevant to current trading under time constraints play an important role

in guiding attention and rapidly choosing appropriate action Both poor regulation of non-

19

relevant emotions and recourse to the attempted suppression of all feeling run the risk of masking

these important cues

The Role of Managers in Emotion Regulation

Further evidence of the importance of emotions and their regulation to trader performance

came from interviews with trader managers A few managers described their role in primarily

technical terms focusing on risk management and personal supervision of problematic trades

However many of those we interviewed clearly saw regulating the emotions of traders who

worked for them as a key element in managing trader performance

ldquoI have to play the role of director of emotions in the sense that when they are down

you have to boost their morale and when they are too excited they want to do stupid

things I have to cool them downrdquo 119 senior manager

ldquoI care deeply because I have tremendous pride in the people herehellipThe stress is

generated by fear entirely and it‟s fear of what I guess everyone has their

insecurities whether it‟s being fired losing lots of money and appearing stupid in

front of their peer group Whatever it is it‟s definitely fear and if you can take the

fear out of the situation they perform betterrdquo 123 senior trader manager high

experience high pay

Many traders described such episodes of managerial intervention as crucial to their

learning and development For example-

ldquoI lost $1m in the first 10 days of the year This was at a time when if you made $1m

in a year that was huge I was devastated and my boss asked me for lunch at the

weekend - I thought that was the end of my career My boss said bdquoa lot of the guys

think you‟re OK but they are worried you are going to be afraid to trade that you‟re

20

going to be gun shy and lose your confidence We want you to know that we like you

and if you think you‟ve got to buy them buy them and if you‟ve got to sell them sell

them but whatever you do don‟t stop trading‟ So that was a huge relief Since then I

don‟t get too depressed about losing money although there are always good days

and bad daysrdquo 25 low experience medium performance

Other managers clearly gave thought to the relative strengths and weaknesses of more

intuitive versus more analytical traders in their decisions about matching traders to roles -

ldquoA gut trader should trade a liquid market - he might change his feel so he needs to

get out The analytical trader who thinks much more about what he‟s doing will

change their mind less often and trade with a different time frame A gut trader can

be bullish in the morning The analytical trader will look at something for a week

and then put on a position - less important to get in and out He doesn‟t need to be in

a liquid market - in an emerging market you need a more analytical traderrdquo 122

Manager

ldquoDerivatives are very quantitative and people think if you have a PhD you will be

very good because you have an understanding of options theory but this is not

always the case and you tend to overlook things Although you can put the

parameters into the model there are still a lot of things which are uncertain

Sometimes adding a more qualitative feel to it ndashbdquoyes that‟s what the model says but

the risk doesn‟t look right‟ hellip I tend to have a mixture of people on the desk - those

who are more quantitative and those who are more common sense or gut instinct

traders Having the blend is quite useful for bouncing ideasrdquo 124 Manager

These reflections have implications for management strategies in trading environments or

indeed any others where the main role of the operative is complex decision-making under

21

constraints of time and uncertain and incomplete information We consider these points further in

our discussion

Emotional Cues and the Use of Intuition

The second broad theme concerned the role of emotional cues in traderslsquo decision-

making Many of the traders discussed this aspect of emotion as intuition Traderslsquo own accounts

and conceptualizations of intuition fit well with Dane and Prattlsquos (200740) definition of intuition

as ―affectively charged judgments that arise through rapid non-conscious and holistic

associations For example -

ldquo[W]ithout a doubt some of the best bargains are the ones you dont do You know

theyre bad bargains You know It‟s a gut feel Youve looked at the playing field and

you just know this is a bad bargainrdquo 106 high experience moderate pay

Some of the traders see a more subtle and sophisticated role for emotions which represent

an unconscious drawing on experience -

ldquoI think many people do say theyre gut-feel traders but perhaps theyre not analyzing

what theyre actually thinking and theyre seeing a lot of customer flow and a lot of

buyers and they probably dont necessarily realize the reasons why they want to buy

But there are very good traders that say theyre trading off gut feel that I believe

actually have probably reasonable information reasonable thoughts behind it but

they wouldnt literally toss a coinrdquo 55 high experience high pay

Feelings are also seen as a kind of radar directing attention and shaping perceptions

around opportunities to enable them to be promptly seized

ldquoI think what a trader has to have is not necessarily this gut feeling but this nose for

opportunities If an opportunity comes along you have to be able to spot it and see it

22

and sometimes people you typically find in this business - an opportunity is there and

they cant see it and then its taken by someone else and its like oh yeah that was a

good idea but it is gonerdquo 58 high experience low pay

Not only do feelings act as a kind of radar directing attention but they do so in a way that

enables rapid decision making under time pressure As one trader noted -

ldquoTrading includes stuff which is beyond trading Trading is when you make decisions

involving financial risk that have two qualities you have to make them in someone

else‟s time schedule not your own and when you make a decision you have to be

confident when you have incomplete or imperfect information and therefore there

must be some kind of intuitive or qualitative elementrdquo 121 high experience high pay

Experienced traders made much more reference to intuition or gut feellsquo as they often

phrased it than less experienced traders However again there were important differences

between low and high paid traders in the high experience group Low paid traders who talked

about the use of intuition often talked of it in terms of a rather mysterious process You either had

a feeling or not For example

ldquoIt‟s almost like a sixth sense Something comes over you and you feel like - yes I

know they‟re going to be looking to buy these later on or looking to sell these later

onrdquo 116 high experience low pay

By contrast the top paid group tended to reflect critically about the origins of their

intuitions and to bring them together with more objective information -

ldquoIf I do fancy a stock - you have a feeling it feels right it has done nothing for like

two or three months and you‟ve seen sellers and they start to dwindle and it is just

stagnant and then you have a look on the charts you refer to the technical side as

well as the emotional side of the trade So you know a combination of technical and

23

emotional as well as what the analyst thinks as well so you sort of bring the

instruments you have available to you to make the decision rather than the snap

[snaps his finger] I fancy buying thatrdquo 101 high experience high pay

ldquoI may examine opportunities based on intuition that something is going to happen

but the decision is based on something I think is rationalrdquo 68 medium experience

high pay

Reported use of intuition does seem to increase with trader experience However traderslsquo

engagement with their feelings is qualitatively different between low and high performers High

performing traders seem to engage with their intuitions at a meta-cognitive level and make

judgments about the relevance of these feelings to the decision at hand This is consistent with

the growing literature on expertise which points to experience as a necessary but insufficient

condition for the development of expertise and points to the role of extended critical engagement

with practice in developing expertise (Ericsson 2006 Ericsson Krampe amp Tesch-Roemer

1993)

Traders were not universally positive about the role of intuition in market decision making

Some believed reliance on such feelings yields poor outcomes -

ldquoMany traders feel that models have been developed by academics who do not know

markets and [traders] think that gut feeling is more important My experience is that

this is 100 wrong and computers can make better decisions than tradersrdquo 37

medium experience medium pay

Overall however the data support a picture of expert traders having a meta-cognitive

engagement with emotion regulation This process entails discrimination between emotions in

terms of their relevance to the decision at hand and effective strategies for emotion regulation to

enhance performance

24

Empathy

The third identified theme was empathy monitoring own emotions as information

about what other market players might be feeling Only five traders explicitly described

using their own capacity for empathy as a decision making tool Although not frequent in

our data these examples are important illustrating that there is a path for traders beyond

simply seeking to eliminate or reduce the intensity of their emotions These traders

fostered feelings as a source of information about other market actors which they managed

and used in a self-aware analysis One trader described using his own fear as an indicator

of fear in the market Another described actively imagining the feelings of other market

actors ―trying to put myself in [the Bank of England Governorlsquos] feet to develop a feel for

how he feels and thinks 14 high experience high pay

Three traders talked about an emotional affinity with the feelings of people in

national markets (Spain 34 high experience medium pay Italy 70 medium experience

low pay and Japan 117 high experience medium pay) with whom they shared a common

culture and propensity to react emotionally in similar ways to the same market events This

group was small but these data broaden the picture of traders reasoning with emotionlsquo

and offer a potentially rich and fruitful avenue for future research

DISCUSSION AND CONCLUSIONS

To ask whether emotion disturbs or aids traderslsquo decision-making is to ask the wrong

question Traderslsquo emotions and cognition are inextricably linked Therefore a more productive

question to ask in this context is whether there are more or less effective strategies for managing

and using emotion in financial decision-making This has been the thrust of our analysis which

25

sought to move beyond previous work that simply characterizes emotional arousal as detrimental

to performance (eg Lo et al 2005 Schunk and Bersh 2006) The study contributes to our

understanding of the role of emotions in work and decision-making in several distinct ways In

contributing to our understanding of the role of emotion at work this study has particular

relevance in that it considers a work domain which has been theorized as strongly normatively

rational as opposed to a work domain (such as negotiation or customer service) where

performance is primarily dependent on effective social interaction However it is clear from this

study that even within such an analysis-intensive domain as financial trading emotion plays a

central role Traders and their managers are frequently preoccupied with the effective regulation

and use of emotions in their work Our work points to the value of a more nuanced understanding

which considers the role of emotions in decision-making the differential impact of various

emotion regulation strategies the conditions under which gut-feellsquo may support effective

decision-making and the role of empathic responses in understanding the behavior of other

market actors

Effective emotion regulation seems to be a critical success factor in trading for our

findings suggest that the strategies for emotion regulation adopted by expert higher performing

traders are qualitatively different from those of lower performing traders In particular higher

performers are more inclined to regulate emotions through attentional deployment and cognitive

change and may display a willingness to cope with negative feelings in the interests of

maintaining objectivity and pursuing longer term goals The kind of attention and appraisal-

focused emotion regulation strategies used by high-performing traders do not seem to be too

cognitively expensive and are effective in reducing negative experience of emotion (Gross

2002) By contrast less expert traders engage either in avoidant behaviors such as walking

away from the desk or invest significant cognitive effort in modulating their emotional

26

responses This extends previous findings (eg Grandey 2003) concerning the performance

benefits of antecedent versus response-focused emotion regulation in the context of emotion

labor to the very different context of financial decision-making Our findings also suggest that

willingness to endure negative feelings in pursuit of long-term goals may be more adaptive than

purely defensive strategies aimed at maintaining positive feelings (Labouvie-Vief 2003 Tamir

2005)

This study also provides evidence that more effective emotion regulation strategies can be

learned in a financial decision-making context While an individuallsquos preferred approach to

emotion regulation is likely to be influenced by personality traits neuroticism and extroversion in

particular (Gross amp John 2003) our interviews with traders and their managers also point to the

importance of traderslsquo learned strategies for emotion regulation Importantly our study also

suggests that defensive emotion regulation strategies may be problematic because they reduce

opportunities to exercise expert intuition

These findings go well beyond prior research on emotion regulation and performance

(eg Grandey 2003) which has a primary focus on performance in the context of interpersonal

interaction Our findings uniquely address the performance of professional traders for whom

performance is not primarily dependent on interpersonal interaction and which has been

theorized as strongly rational involving the selection of optimal strategies in the face of complex

cognitive demands and requiring attention to a large volume of information with uncertain

relevance

Turning to intuition traders in our study mirror the balance of opinion in the research

literature on intuition They are equivocal about whether feelings and hunches about appropriate

courses of action lead to better or worse outcomes than purely rational analysis There were

strong feelings on both sides with traders being quite evenly divided between the two camps

27

However again our study suggests the importance of a more nuanced approach than simply

asking whether reliance on intuition is good or bad and points towards the conditions in which

reliance on intuitive judgment may be more and less effective The findings suggest that one

characteristic of higher performing traders may be a greater willingness to reflect critically about

their intuitions and feelings about trading These traders often reported relying on intuition but

they tend to weigh their feelings critically alongside other evidence and to reflect about the

provenance of those feelings Lower performing traders may rely on feelings alone and show

less propensity to think critically about the source of hunches This reflection by expert traders

about the provenance of feelings may be particularly salient given Schwarz and Clorelsquos (1983

2003) finding that the impact of emotions on behavior is reduced or disappears when the

relevance of those emotions is explicitly called into question

That traderslsquo reliance on affective cues in decision-making can support effective

performance is consistent with Damasiolsquos observation that deciding advantageously depends on

the use of affective cues in both learning and deciding (Bechara et al 1997 Damasio 1994)

There is increasing evidence that humans are naturally proficient in the ability to acquire

expertise and that encapsulation of experience in expert intuition and perception via system one

provides a means of by-passing cognitive limits (Ericsson 2006) The nature of expertise could

counteract the inherent environmental uncertainties that Tiedens and Linton (2001) identified as

leading to more conscious appraisal of information While not an unequivocal result our finding

of greater critical engagement among higher performing traders with intuitions and their more

sophisticated deployment of intuition in combination with analysis suggests an important

direction for future research

The small number of accounts of traders monitoring their own emotions as a source of

information about the emotions of other market actors was intriguing These data suggest a

28

possibly productive avenue for future research We do not have evidence of performance

outcomes of predictive uses of empathy in this manner but our findings are consistent with

arguments that the evolution of the human brain has been significantly driven by the need to

predict the behavior of other humans often via subtle cues (eg Nicholson 2000)

We suggest that the identification of links between decision-making performance and

emotion regulation in this study has important implications for theory development in two key

fields First while somewhat tacit in much of the literature the implication of many claims in the

decision-making and behavioral finance literatures is that a range of key decision-making biases

are underpinned by mechanisms which involve emotion processes One relevant explicit example

is Thalerlsquos (1985 1999) account of the role of hedonic editinglsquo in mental accounting and the

disposition effect (the tendency to hold losing assets longer than winning assets) This explains

key biases in terms of the desire to maintain positive hedonic tone There is evidence too of

interpersonal variation in propensity to exhibit such biases for example investors vary in their

propensity to exhibit the disposition effect (Shapira amp Venezia 2001 Weber amp Welfens 2008)

In this study we have seen that traders seek to regulate emotions in order to avoid decision biases

and that higher performing traders typically exhibit more sophisticated emotion regulation

strategies This suggests that it would be productive to investigate the role of emotion regulation

as one key source of interpersonal variation in susceptibility to a range of decision biases

A second implication concerns the role of emotion in expert performance While much

attention has been paid to the nature of cognition in expert performance the expertise literature

hardly considers the role of emotion For example examining the index of the Cambridge

Handbook of Expertise and Expert Performance (Ericsson et al 2006) reveals very few

references to emotion and these are peripheral to the main arguments of the chapters which

contain them Our research suggests first that effective emotion regulation may be an important

29

facet of expert performance and second that greater attention should be paid to the interactions

between emotion emotion regulation and expert intuition Further research could test the

proposition that effective expert intuition is reduced by reliance on defensive emotion regulation

strategies

While our study points to the importance of intuition in traderslsquo work it may be that the

relative importance of intuition and analysis vary with task characteristics such as time span of

decision-making Certainly this seemed to be the view of several senior managers with

responsibility for allocating traders to trading roles The interplay that expert traders described

between intuition and analysis is also intriguing The importance of context to the role of affect

in decision-making has been noted in prior research (Forgas amp George 2001) Further research

could usefully explore this aspect of traderslsquo expertise

This study also contains some potentially important implications for practice First it

points to the importance of learned strategies for emotion regulation and the need for effective

support for their development Second our data directly and indirectly point to the key role of

management in this process Our findings suggest that there may be considerable benefits to

skilled managerial interventions that help to steer effective emotion regulation and support

inexperienced traders in developing emotion regulation skills Additionally managers may be

able to help traders to understand the productive role that critically engaged experience-based

intuition may play in decision-making Our evidence suggests that many high performing traders

deploy a reflective and critical approach to the use and development of intuition well-founded in

experience Managers could help to guide this process through coaching The contextual

dependence of high quality intuitions suggests they are quite domain specific and may not

transfer across contexts As several informants told us this is especially true for traders operating

under different market conditions

30

We heard repeated concerns from senior managers who worried about traders who had

not seen a bear market and would not operate well when that occurred We also heard many

stories of people transferring between trading areas and needing time to re-contextualize

expertise before their intuitions could be considered reliable Thus managers have a role in

helping traders to extend the boundaries of their expertise Given recent events in financial

markets our findings may be relevant to an understanding of how traders react under massively

changed trading conditions and how those reactions might either contribute to or result from

market volatility

This research has some important limitations First although we have argued for the

importance of an account of emotion that includes the experience of emotion as Pham (2004

368) notes the affective system is focused on the present Thus people can be poor at recalling or

predicting emotions There are limits to the human capacity to introspect on emotion processes

and to recall the experience of emotion These limits are also subject to wide individual

differences The capacity for introspection and recall will also vary between individuals For this

reason studies such as ours need to be complemented with more physiologically based research

as well as further qualitative and quantitative studies

Second as in all work contexts traders subscribe to norms of socially sanctioned

behavior and to common narratives about the nature of their work We have not treated emotional

labor as a primary component of traderslsquo work and performance The majority of work

interactions are carried out through highly abbreviated electronic exchanges which provide a poor

medium for the communication of emotion However there is a sense in which traders engage in

emotional labor since especially for novices there are social pressures to comply with display

rules which emphasize the avoidance of displays of strong emotion One common narrative

thread that ran though many traderslsquo accounts of their work was a representation of trading work

31

as principally concerned with rational analysis from which emotions are a dangerous distraction

This narrative seemed particularly strong in the accounts of less experienced traders Although as

we have seen the mask would often slip as they discussed their work Some traderslsquo accounts

were clearly colored by a desire to conform to this mode of self-presentation In consequence it is

possible that in our interviews and during data analysis we were at times unable to distinguish

effectively between defensive denial of emotion and effective regulation of emotion This would

be another avenue for future research

To conclude we know that emotions are a rich source of experience in everyday life but

at the same time in work contexts they can be a source of vulnerability a wayward influence over

judgment and a source of disturbance to process The more ―rational-economic such

environments are the more likely we are to hold such beliefs (Nicholson 2000) Our research

illustrates that this position is false or at best short-sighted In the hyper-rational world of

trading in financial markets we did find some evidence that emotions disturbed performance but

mostly among the inexperienced and un-reflective traders The best traders are able to regulate

emotions effectively and incorporate relevant emotions as information ndash signals or a kind of

radar that contain information about risks what is going on in the minds of others and the weight

and relevance to be accorded to onelsquos own past experience

32

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Bargh J A Chen M amp Burrows L (1996) Automaticity of social behavior Direct effects of

trait construct and stereotype activation on action Journal of Personality and Social

Psychology 71 230-244

Baumeister R F Bratslavsky E Muraven M amp Tice D M (1998) Ego depletion Is the

active self a limited resource Journal of Personality and Social Psychology 74 1252-

1265

Bechara A Damasio A Tranel D amp Damasio A R (1997) Deciding advantageously before

knowing the advantageous strategy Science 275 1293-1295

Bower G H (1981) Mood and memory American Psychologist 36 129 ndash 148

Bower G H (1991) Mood congruity of social judgments In J P Forgas (Ed) Emotion and

social judgments (pp 31ndash53) Oxford Pergamon Press

Braun V amp Clarke V (2006) Using thematic analysis in psychology Qualitative Research in

Psychology 3(2) 77-101

Buck R (1999) The biological affects a typology Psychological Reveiw 106 301-336

Damasio A R (1994) Descartes‟ error Emotion reason and the human brain New York

Putnam

Dane E amp Pratt M G (2007) Exploring intuition and its role in managerial decision making

The Academy of Management Review 32 33-54

De Bondt W Palm F amp Wolff C (2004) Introduction to the special issue on behavioral

finance Journal of Empirical Finance 11 423-427

Dreyfus H amp Dreyfus S (2005) Expertise in real world contexts Organization Studies 26

779-792

Epstein S Pacini R Denes-Raj V amp Heier H (1996) Individual differences in intuitive-

experiential and analytical-rational thinking styles Journal of Personality and Social

Psychology 71 390-405

Ericsson K A Krampe R T amp Tesch-Roemer C (1993) The role of deliberate practice in the

acquisition of expert performance Psychological Review 100 363-406

Ericsson K A (2006) An introduction to the Cambridge Handbook of Expertise and Expert

Performance its development organization and content In K A Ericsson amp N Charness

amp P J Feltovich amp R R Hoffman (Eds) The Cambridge Handbook of Expertise and

Expert Performance 1st ed 3-20 Cambridge Cambridge University Press

Fama E F (1991) Efficient Capital Markets II The Journal of Finance 46 1575-1617

Fama E F (1998) Market efficiency long-term returns and behavioral finance Journal of

Financial Economics Vol 49 283-306

Fenton-OCreevy M Nicholson N Soane E amp Willman P (2005) Traders Risks Decisions

and Management in Financial Markets Oxford Oxford University Press

Finucane M L Alhakami A Slovic P amp Johnson S M (2000) The affect heuristic in

judgments of risks and benefits Journal of Behavioral Decision Making 13(1) 1-17

Forgas JP amp George JM (2001) Affective influences on judgments and behavior in

organizations An information processing perspective Organizational Behavior and

Human Decision Processes 86(1) 3-34

Grandey AA (2000) Emotion Regulation in the Workplace A new way to conceptualize

Emotional Labor Journal of Occupational Health Psychology 5(1) 95-110

33

Grandey A A (2003) When the show must go on surface acting and deep acting as

determinants of emotional exhaustion and peer-rated service delivery Academy of

Management Journal 46 86-96

Gray JA (1999) Cognition emotion conscious experience and the brain In T Dalgleish and

MJ Power (Eds) Handbook of Cognition and Emotion (pp83-102) Chichester England

Wiley

Gross J (2002) Emotion regulation affective cognitive and social consequences

Psychophysiology 39 281

Gross J J amp John O P (2003) Individual differences in two emotion regulation processes

Implications for affect relationships and well-being Journal of Personality and Social

Psychology 85(2) 348-362

Gross J J amp Thompson R A (2007) Emotion regulation Conceptual foundations In J J

Gross (Ed) Handbook of emotion regulation New York NY Guilford Press

Isen A M Shalker T E Clark M amp Karp L (1978) Affect accessibility of material in

memory and behavior A cognitive loop Journal of Personality and Social Psychology

36 1-12

Johnson E amp Tversky A (1983) Affect generalization and the perception of risk Journal of

Personality and Social Psychology 45(1) 20-31

Kavanaugh D amp Bower G (1985) Mood and self-efficacy Impact of job and sadness on

perceived capabilities Cognitive Therapy and Research 9 507-525

Klein G A Calderwood R amp Clinton Cirocco A (1986) Rapid decision-making on the

fireground Human Factors and Ergonomics Society 30th Annual Meeting Vol 1 576-

580

Knorr-Cetina K amp Brugger U (2002) Traders Engagement with Markets A Postsocial

Relationship Theory Culture and Society 19(5-6) 161-185

Labouvie-Vief G (2003) Dynamic integration Affect cognition and the self in adulthood

Current Directions in Psychological Science 12 201-206

Lerner J S amp Keltner D (2001) Fear anger and risk Journal of Personality and Social

Psychology 81(1) 146-159

Lerner J S Small D A amp Loewenstein G (2004) Heart strings and purse strings Carryover

effects of emotions on economic decisions Psychological Science 15(5) 337-341

Lo A Repin D amp Steenbarger B (2005) Fear and greed in financial markets A clinical study

of day traders American Economic Review 95 352-359

Lo A W amp Repin D V (2002) The Psychophysiology of Real-Time Financial Risk

Processing Journal of Cognitive Neuroscience 14 323-339

MacKenzie D (2006) An Engine Not A Camera How Financial Models Shape Markets

Cambridge Mass MIT Press

Mayer JD amp Hanson A (1995) Mood-congruent judgment over time Personality and Social

Psychology Bulletin 21 237-244

Mayer JD DiPaolo M and Salovey P (1990) Perceiving affective content in ambiguous

visual stimuli a component of emotional intelligence Journal of Personality Assessment

54 772-781

Miller G (2003) The cognitive revolution a historical perspective Trends in Cognitive Science

7 141

Muraven M amp Baumeister R F (2000) Self-regulation and depletion of limited resources

Does self-control resemble a muscle Psychological Bulletin 126 247-259

Nicholson N (2000) Managing the Human Animal London ThomsonTexere

34

Peterson R L (2007) Affect and financial decision-making How neuroscience can inform

market participants The Journal of Behavioral Finance 8(2) 70-78

Pham M T (2004) The logic of feeling Journal of Consumer Psychology 14 360-369

Phelps E A (2006) Emotion and cognition Insights from studies of the human amygdala

Annual Review of Psychology 57 27-53

Sayer A (1997) Essentialism social constructionism and beyond The Sociological Review 45

453-487

Shapira Z amp Venezia I (2001) Patterns of behavior of professionally managed and

independent investors Journal of Banking and Finance 25 1573ndash1587

Schunk D amp Betsch C (2006) Explaining the heterogeneity in utility functions by individual

differences in decision modes Journal of Economic Psychology 27 386-401

Schwager J D (1993) Market Wizards Interviews with Top Traders New York Collins

Schwarz N amp Clore G L (1983) Mood misattribution and judgments of well-being

Informative and directive functions of affective states Journal of Personality and Social

Psychology 45 513-523

Seo M G Barrett L F amp Bartunek J M (2004) The role of affective experience in work

motivation Academy of Management Review 29 423-439

Seo M G amp Barrett L F (2007) Being emotional during decision makingmdashgood or bad An

empirical investigation The Academy of Management Journal 50 923-940

Shefrin H (2000) Beyond Greed and Fear Understanding Behavioral Finance and the

Psychology of Investing Boston MA Harvard Business School Press

Stokes A F Kemper K amp Kite K (1997) Aeronautical decision making cue recognition and

expertise under time pressure In C E Zsambok amp G Klein (Eds) Naturalistic Decision

Making pp 183-196 Mahwah NJ Erlbaum

Tamir M (2005) Dont worry be happy Neuroticism trait-consistent affect regulation

and performance Journal of Personality and Social Psychology 89 (3) 449 ndash

461

Thaler R H (1985) Mental accounting and consumer choice Marketing Science 4(3) 199-214

Thaler R H (1993) Advances In Behavioral Finance New York Russel Sage Foundation

Thaler R H (1999) Mental accounting matters Journal of Behavioral Decision Making 12(3)

183-206

Tiedens L amp Linton S (2001) Judgment under emotional certainty and uncertainty the effects

of specific emotions on information processing Journal of Personality and Social

Psychology 81(6) 973-988

Todd P M amp Gigerenzer G (2007) Environments that make us smart Ecological rationality

Current Directions in Psychological Science 16 167-171

Totterdell P Briner R B Parkinson B amp Reynolds S (1996) Fingerprinting time series

dynamic patterns in self-report and performance measures uncovered by a graphical non-

linear method British Journal of Psychology 87(1) 43-60

Weber M amp Welfens F (2008) Splitting the Disposition Effect Asymmetric Reactions

Towards bdquoSelling winners‟ and bdquoHolding Losers‟ Working Paper University of

Mannheim

Wright WF amp Bower GH (1992) Mood effects on subjective probability assessment

Organizational Behavior and Human Decision Processes 52 276ndash91

2

ABSTRACT

We report on a qualitative investigation of the influence of emotions on the decision-making of

traders in four City of London investment banks a setting where work has been predominantly

theorized as dominated by rational analysis We conclude that emotions and their regulation play

a central role in traderslsquo decision-making We find differences between high and low performing

traders in how they engage with their intuitions and that different strategies for emotion

regulation have material consequences for trader behavior and performance Traders deploying

antecedent-focused emotional regulation strategies achieve a performance advantage over those

employing primarily response-focused strategies We argue that in particular response-focused

approaches incur a performance penalty in part because of the reduced opportunity to combine

analysis with the use of affective cues in making intuitive judgments We discuss the

implications for our understanding of emotion and decision making and for traderslsquo practice

3

INTRODUCTION

In this paper we describe a qualitative study which develops our understanding of the role

of emotion intuition and emotion regulation in financial decision-making The study addresses

three research questions First it tests whether emotions play a significant role in decision-

making in financial trading which has been characterized as rational in the classical economic

sense A second question concerns the nature of traderslsquo own understanding of the role played by

emotion and affectively cued intuitions in their decision making performance A third question is

whether there is a link between traderslsquo emotion regulation strategies engagement with

affectively cued intuitions and decision making performance

Neo-classical financial economics has been a prime influence on research into markets

and market behavior Traders within financial markets have been understood as profit

maximizers who act on price information which summarizes all available knowledge about asset

values (Fama 1991 1998) Financial markets are designed to be transparent and have low

transaction costs such that profit opportunities are only fleetingly available and market

imperfections are eradicated (MacKenzie 2006) Within this paradigm there are strong

assumptions about investor rationality and the nature of investor preferences

Understanding of markets and market behavior has been developed by the advent of

behavioral finance (De Bondt Palm amp Wolff 2004 Thaler 1993) which has drawn upon the

insights of cognitive psychology to incorporate the ―irrational elements of cognitive biases and

collective sentiments such as herding behavior into models of financial decision making

Behavioral finance has had some success in modeling investor behavior and explaining well

known deviations of market behavior from the predictions of the efficient markets hypothesis ndash a

mainstay of the neo-classical paradigm (Fama 1991) However within this field of study the

main role accorded to emotions to date is that they are portrayed as interfering with rational

4

cognition or they are seen as outcomes of the decision process affecting anticipated utility In

neither case are they acknowledged as integral and primary in their effects on choice and action

(eg Shefrin 2000 Peterson 2007) The trader practitioner literature though is full of references

to emotion and market sentimentlsquo For example -

ldquoTrading is emotion It is mass psychology greed and fearrdquo (Marcus in Schwager

1993 49)

Despite renewed interest in emotions and emotion regulation in the workplace applied

empirical work in field settings has been limited (Seo Barrett amp Bartunek 2004) and has largely

focused on the relatively narrow domain of emotional labor or emotions have been

decontextualized In this paper we examine the impact of traderslsquo emotions on their perceptions

behavior and performance in financial markets using interview data from 118 professional traders

and 10 senior managers in investment banks We consider traderslsquo understanding of the role of

emotion in their trading practice and seek to shed light on the ways in which traders experience

and regulate work-related emotions and how these processes change with increased expertise We

also explore the relationship between traderslsquo experience of emotion emotion regulation and

expert performance Our goal is to build a bridge between experimental and neuroscience

research into the role of emotions and rich accounts of traderslsquo lived experience of emotion in

their thinking deciding and acting (Sayer 1997)

The structure of this paper is as follows First we review relevant literature on emotions

and cognitions in decision-making and on emotion regulation including studies of traders and

investors Second we use qualitative data from interviews with traders and their managers to

address our research questions and discuss the data in relation to the literature We consider and

codify traderslsquo accounts of the role of emotion in their work and explore the relationship between

5

emotion regulation approach to engaging with intuition and trader performance Finally we

consider the theoretical and practical implications of our findings

THEORETICAL ORIENTATION

The Relationship between Emotion and Cognition

Cognition as a field of study within psychology emerged in the middle of the 20th

century

as a reaction to the dominance of behaviorism (Miller 2003) A guiding metaphor for much

cognitive psychology has been the brain-as-computer an analogy which leaves little place for

emotion except as a disturbance of optimal cognitive functioning or as a signaling system that

accompanies action and experience Thinking has been understood as quite apart from feeling In

a major review of research into the relationships between emotions and cognition Phelps (2006)

concludes that understanding the role and significance of emotion is critical to understanding

cognition It has become clear that cognition is not only affected by emotion but that emotion is

central to our cognitive functioning Current models have converged on dual processing theories

of cognition (Bechara et al 1997 Buck 1999) which suggest that decision-making is

underpinned by two parallel processes System one is rapid pattern recognition activates

emotionally weighted biases which in turn activate stored behavioral repertoires This process is

non-conscious with important parallels to perceptual processes and linked to intuitive decision

making (Dane amp Pratt 2007 Epstein et al 1996) System two the slower process involves

conscious deliberation and analysis (the executive function) facts are represented and weighed

options are generated and compared potential outcomes are modeled and learned reasoning

strategies are applied

Models of the dual process approach consider these two decision processes not as

completely separate but as interacting Conscious analysis of a situation can affect emotional

6

appraisal and immediate affective response may be one input among others into deliberation

Most of our behaviors (and associated decisions) happen in an automatic fashion with minimal

active participation by the conscious self unless we are confronted with a novel situation (Bargh

et al 1996) or uncertainty (Tiedens amp Linton 2001) The brainlsquos capacity for conscious

deliberation is limited and can be depleted much as a muscle can become exhausted (Baumeister

et al 1998 Muraven amp Baumeister 2000) Thus particularly in fast-paced and demanding

environments conscious deliberation is reserved for tasks that are accorded the highest priority

Emotions have an important role as cues to decision making Finucane et al (2000) suggest that

emotions act as a heuristic That is emotions provide an accessible summary of experience

cognitions and memories One might expect that traders given the volume of decision demands

will engage in a great deal of automatic decision making and use emotional cues There is some

empirical evidence supporting this view Lo and Repin (2002) carried out a small-scale study of

the physiological responses (blood pressure and skin conductance) of professional traders (N=10)

to actual market events They found emotional arousal to be a significant factor in the real-time

financial decision-making of both novice and experienced traders Less experienced traders

showed stronger arousal in response to short-term market fluctuations than more experienced

traders indicating that emotions are particularly important in relatively novel situations that

require cognitive effort

Emotion and Decision-Making Performance

There is evidence that emotions affect decision-making performance First there is a

range of evidence that emotions can induce biases in decision-making Emotions can skew

information retrieval For example there is evidence that it is most easy to recall experiences that

are congruent with current emotional state (Bower 1981 1991 Mayer et al 1990) Emotions

also directly bias decision-making for example fear and anger have significant (and opposite)

7

effects on risk perceptions (Lerner amp Keltner 2001 Lerner et al 2004) Additionally emotions

bias the value attached to outcomes For example intense negative emotions enhance valuation of

short-term outcomes regardless of negative long term consequences (Gray 1999) Overall

positive affect tends to be associated with optimistic decision making and negative affect with

pessimistic choices (Isen et al 1978 Johnson amp Tversky 1983 Kavanagh amp Bower 1985

Mayer amp Hanson 1995 Schwarz amp Clore 1983 Wright amp Bower 1992)

Emotions also have a role in risk-related decision making A laboratory study of financial

decision-making under risk found that low levels of emotional experience led to higher levels of

performance through greater risk neutrality due to a more constant association between objective

gain and subjective value (Schunk amp Betsch 2006) Lo et al (2005) found clear associations

between day-traderslsquo emotions their decision making and performance There was evidence that

positive decision-making outcomes as assessed by profits and losses were associated positively

with pleasant affect (eg content) and negative outcomes with unpleasant affect (eg bored)

Furthermore investors who experienced more intense positive and negative emotional reactions

to gain and loss were poorer performers than those with more attenuated emotional responses

The authors suggested that rapid emotional decision making is unsuited to the complex

information-rich environment of trading The trading practitioner literature also tends to promote

the view that emotions are detrimental to decision making exemplified in the following quotation

from highly rated trader Bruce Kovner ―Whenever a trader says bdquoI wish‟ or bdquoI hope‟ he is

engaging in a destructive way of thinking because it takes away from the diagnostic thought

process (Schwager 1993 82) In contrast Seo and Barrett (2007) carried out a study of

investment club members using an internet-based investment simulation accompanied by

emotional-state surveys They found that individuals who experienced more intense emotions

achieved higher decision-making performance

8

Thus while there is ample evidence that emotions affect decision-making performance

including for traders the evidence on the nature of that impact is mixed While there is evidence

for the biasing effect of emotions there is also evidence that we rely on emotional cues in rapid

automatic decision-making and they confer a tangible advantage to everyday decision-making

(Bechara et al 1997)

Research into the nature of expertise has tended to characterize intuition (a form of

experientially-based pattern recognition linked to the affectively cued system 1 (Dane and Pratt

2007)) as integral to expert performance ndasheg Dreyfus amp Dreyfus 2005 Klein et al 1986

Stokes et al 1997) Dane and Pratt (2007) note an important distinction between on the one

hand the decision heuristics literature which mainly supports a view of intuitive decision-

making as inferior to more rational models and on the other the literature on expertise which

emphasizes the central role of intuition in expert performance A crucial difference between these

literatures is the different emphasis placed on research method and context Research on decision

heuristics is often context free and relies heavily on experiments using subjects who are

inexperienced in the tasks studied There is also evidence that some of the key cognitive biases

identified as maladaptive products of heuristic reasoning in experimental settings either do not

occur or lead to better outcomes when decision-making is studied in the field or studied using

approaches that approximate real life contexts (Todd amp Gigerenzer 2007) The expertise

literature in contrast places great emphasis on domain specific knowledge and skills on the

development of complex cognitive schema that enable rapid associative pattern recognition and

on the activation of extensive and complex behavioral repertoires Dane and Pratt (2007) argue

that in consequence intuition will be more likely to function as an effective component of

decision-making in performance domains that require significant experience and complex domain

relevant schema a description which fits the world of financial trading

9

In summary the emotions literature gives considerable support to the idea that emotions

have multiple critical impacts on decision-making Some of these can be characterized as bias

with the potential to be detrimental to decision-making performance However it is also apparent

that there is an alternative position it is not emotions per se that are detrimental to decision-

making performance but rather that expertise and the regulation of emotions determine whether

emotions have positive or negative impacts on decision performance

Emotion Regulation

Accounts of emotions as bias focus primarily on the potential for emotions to have a

negative influence on performance By contrast accounts of emotions as information focus

primarily on the valuable role of emotions in encapsulating prior relevant experience In

principle these two perspectives may not incompatible and effective emotion regulation may

have a role in reducing the biasing effect of emotion while retaining sensitivity to the information

which emotions may carry It thus seems likely that the regulation of emotion may play an

important role in emotion performance effects Gross (2002 Gross amp Thompson 2007)

distinguishes a series of different stages in emotion episodes and five associated emotion

regulation strategies The model suggests that people both choose and modify situations

Situations require attention and appraisal which leads to an emotional response

Attempts to manage emotions may focus on any of the stages indicated in the above

model One approach to managing emotions is to select avoid or modify situations Other

approaches include focusing attention on emotionally salient elements of a situation and where

emotional responses might be difficult to cope with reframing situations to modify the emotional

response It is also possible to avoid emotional responses by refocusing attention elsewhere Each

of these strategies could lead to responses being modulated or suppressed Gross and Thompson

(2007 16) make clear that this model of emotions and their regulation is something of a

10

simplification However the model usefully illustrates the central role of emotion regulation in

decision-making

In addition to theoretical modeling there is empirical evidence for a relationship between

strategies for emotion regulation and a range of important outcomes Recent research has paid

particular attention to the difference in outcomes between antecedent-focused emotion regulation

strategies which seek to change emotions before emotion responses have become fully activated

and response-focused regulation strategies which modify behavior and emotion expression once

the emotion response is underway Emotion regulation strategies have been shown to have

differential effects on outcomes including cognitive performance health and qualities of social

interaction (Gross and Thompson 2007) In the domain of work performance much attention has

focused on the emotional labor required by customer service interactions Here emotion

regulation has been characterized as a process of deep and surface acting Surface acting is the

faking of emotion display to accord with organization display rules Deep acting involves

modifying inner feelings Grandey (2000) considers emotional labor as a subset of emotion

regulation and equates antecedent-focused and response-focused regulation with deep and surface

acting respectively In a study of front-line service workers Grandey (2003) found antecedent-

focused emotion regulation was associated with greater effectiveness in relating to customers in a

warm friendly manner while response-focused emotion regulation was associated with emotional

exhaustion and greater tendency to break character and reveal negative emotions in a service

encounter This result supports Grosslsquos earlier work (2002) There is also some evidence on

emotion regulation and financial decision-making Seo and Barret (2007) found that investors

who were better able to identify and discriminate among their current feelings achieved superior

decision-making performance They argued that this relationship was mediated by effective

regulation of the influence of feelings on their decision-making

11

In the present study we go beyond the study of emotion regulation in a context of work

performance that depends primarily on social interaction In contrast to emotional labor studies

which focus on the context of interpersonal interaction most trading nowadays (and in all cases

we studied) is conducted electronically via computer or through highly abbreviated and

formalized electronic messages with counterparties Rather than depending on appropriate

emotion display in the context of customer interaction or negotiating with counterparties trader

performance depends on selecting optimal trading strategies in the face of complex cognitive

demands and the need to process significant amounts of information with uncertain relevance

(Knorr-Cetina amp Bruegger 2002) We now turn to the present study

THE STUDY AND METHODS

The data reported in this paper were collected as part of a large multifaceted study of the

role and behavior of traders working in investment banks For this paper we have returned to this

data corpus to examine the considerable amount that traders told us about their work and

emotion an aspect touched on only superficially in previous analysis of this data (see Fenton-

OCreevy Nicholson Soane and Willman 2005 for an extended account of the study)

Participants

Participants were sampled from four leading investment banks with offices in the City of

London Three banks were American and one was European Managers in each organization were

asked to select a representative sample of traders from a range of markets trading in stocks

bonds and derivatives The mean age of participants was 3281 years (sd = 491) There was

variation in traderslsquo experience with overall tenure (including time with previous employers) in a

range from 6 months to 30 years and a mean job tenure of 780 years (sd = 558) The trader

sample comprised 116 men (983) and 2 women (17) The participants were traders in

equities bonds and derivatives most engaged in either market making or proprietary trading or

12

both We gathered information on individual trader characteristics and performance and carried

out semi-structured interviews with each trader and with a further 10 senior managers Where

traders were also managers we interviewed them twice once as a trader and once as a manager

Data

Qualitative data Interviews lasted between 30 and 90 minutes They were recorded and

transcribed in full The interviews ranged over multiple aspects of the traderslsquo roles and work

The data set for this study consisted of the portions of the interviews relevant to the role of

feelings in traderslsquo work and decision making Traders were asked to describe the range of

emotions they experienced during trading Follow-up questions encouraged them to explore the

long-term and short-term effects of emotions on their decision making and trading strategy the

role of intuition in their trading and the impact of emotions on performance Managers were

asked to describe how they evaluated and managed trader performance Again this often

produced talk about traderslsquo feelings and how they were managed

Performance data Hard performance data for traders are difficult to obtain Measures

such as value at risk trading outcomes and profit and loss are highly confidential in this setting

and were not available to us so we used total remuneration as our measure of trader performance

We felt this to be a reasonable proxy for decision-performance since a high proportion of total

remuneration is a variable annual performance linked bonus and the non-bonus elements tend to

reflect longer term financial performance in this very performance oriented sector We have

treated this variable as an indicator of expertise which Ericsson (2006) defines as reliably

superior performancelsquo Traders were asked to state their income including bonus in terms of

four categories (1 pound50000 - pound99999 (N = 4) 2 pound100000 to pound299999 (N = 41) 3 pound300000-

pound499999 (N = 34) 4 more than pound500000(N = 38) One trader declined to provide this

information

13

Analysis

The raw data were the full transcripts of all interviews We used a thematic analysis

approach which we judged to be particularly well suited to the present study As Braun and

Clarke (2006 78) note thematic analysis does not rest on a single epistemic position but can

span both realist and constructivist approaches We take the position that emotions have both a

measurable biological reality and exist in the realm of socially constructed personal experience in

which emotions have personal and social meaning

Data were open-coded by each author separately then in discussion using the NVIVO

program Common statements were identified and used as the basis for a first set of coding

categories which were subsequently refined and consolidated Coding categories were thus both

emergent from the interviews and drew on constructs identified in the literature (eg approaches

to emotion regulation) relevant to emerging themes Thus coding was both theoretical and

inductive As we analyzed the data and drew tentative conclusions we explicitly sought

disconfirming evidence to test the robustness of our insights In a later stage of analysis we

partitioned the sample into groups of low (lt5 years n=25) medium (5 to 10 years n=48) and

high experience (gt10 years N=45) and into groups of low (remunerationlt pound300k N=45) medium

(pound300k- pound500k N=34) and high expertise (gt pound500k N=38) We compare interview responses of

three specific groups inexperienced low paid traders (N=18) highly experienced but low paid

traders (N=15) and high paid traders (N=38) The remainder of the sample were medium

experience and pay There were no low experience high pay traders We chose the three

comparison groups to provide maximal contrast in differentiating the characteristics associated

with different levels of experience and expertise respectively

14

In Table 1 we summarize our key findings and the nature of the evidence for each finding

In the final column we note our sense of the strength of the evidence for each finding This

represents a qualitative conclusion arrived at though discussion between the authors and drawing

on quantity consistency importance and clarity of supporting data and existence of any

disconfirming evidence In the next section of the paper we discuss these findings and the

evidence for them in more detail Direct quotes are verbatim accompanied by the case number of

the respondent and their classification in terms of experience and pay level

TABLE 1 ABOUT HERE

TRADERSrsquo UNDERSTANDINGS OF EMOTION IN THEIR TRADING PRACTICE

Emotional experience and regulation

For many traders especially the less experienced trading is marked by significant and

persistent emotional responses to successes and setbacks It is relevant to note the distinction

between mood and emotion since both were relevant to traders Mood can be understood as a

relatively diffuse emotional climate which persists over time and not anchored to specific

situations or cognitions In contrast emotions typically have specific objects and give rise to

behavioral response tendencies relevant to those objects (Totterdell Briner et al 1996)

ldquoWhen you lose money you could sit down and cry Anybody who says you couldn‟t

isn‟t being honest with you Of course when it‟s good it‟s fantastic The highs and

lows of a trader‟s life are euphoria or absolute dismayrdquo 106 high experience

medium pay

While these emotional responses would often be triggered by specific events or series of

events in many cases the impact on mood would persist for significant periods with

consequences for subsequent trading behavior For example one manager described a trader

15

working for him as ―having been in the wilderness his confidence totally shattered for about

two years before slowly recovering from a string of losses Many talked about needing weeks or

even months to recover from the impact of major losses especially early in their careers Others

talked about the dangers of false confidence or euphoria which could persist for some time after a

big win

ldquoPeople get a bit arrogant when they have good times but this can be dangerous

because then they stop thinking as muchrdquo 18 medium experience medium pay

ldquoI tend to feel more cautious when losing moneyhellipIf I am having a down month I‟ll

look at trades which I would do if I was having a good month and say I don‟t like it

enough to take the risk on it I become more selective more risk averse and to do a

trade I need to see more than one reason why a trade will work and then might put it

on but not in a huge size When making money I can be more slack 29 high

experience high pay

However our data also suggest emotion regulation is critical to moderating the impact of

emotions on traderslsquo decision making Senior traders and trader managers frequently talked about

the way in which they had developed a capacity to regulate their own emotions and trade more

evenly regardless of success and setbacks

ldquoYou learn to be able to deal with emotions It doesn‟t get to me as much There

were situations when I was extremely stressed up and then you feel physically ill and

you really feel on the verge of throwing up But that was a long time ago and doesn‟t

happen so much now You have seen the ups and downs more You have experienced

them and in a way you are probably more prepared for it and you are aware that

every now and then it will happenhellip but it doesn‟t get to you all that much because

you are aware that it will happen 6 medium experience high pay

16

We examined emotion regulation and its relevance to performance further by considering

data from the three comparison groups (based on experience and pay) We noticed some

important differences in the way in which these groups discussed the interaction between

emotion trading and the use of intuition First there seemed to be notable differences in the

strategies employed for emotion regulation which we describe below in the language of the

Gross and Thompson model (2007) When asked directly about emotion traders in the low

experience group typically started by presenting themselves as fairly immune to the impact of

emotion on their trading However as the interview progressed they would often reveal rather

more vulnerability to emotions than they had claimed initially Take for example this trader who

had been trading for a little less than 4 years -

ldquoI‟m bit of a cold fish I don‟t think emotions greatly affect my decision-making If

you are making money you are achieving your objectivehellip

[But later]

hellipWhen you lose money it can be horrendous violent mood swings You don‟t know

what to do when you lose moneyrdquo 38 low experience low pay

There tended to be two responses types when these traders did talk about their emotions

Some in the low experience low pay group did not talk at all about actively managing their

emotions Others talked about removing themselves from situations when their emotions became

a problem (situation modification) or avoiding situations entirely which make them feel bad

(situation selection)

ldquoI think there is a strong emotional element to trading I think that anyone who‟s

doing it properly and has got their head screwed on is doing everything they can

consciously to overrule that and if I feel that I‟m trading emotionally I will walk off

17

the desk have a glass of water walk up and down the street and then come back and

make decisions when I‟m hopefully not emotionalrdquo 43 low experience low pay

Traders in the experienced group more commonly talked about strategies for emotion

regulation However the nature of these strategies tended to vary between the low paid and high

paid groups In the high experience low paid group traders seemed to find it hard to articulate

how they managed their emotions and the emotion regulation strategies they identified were

predominately situation avoidance situation modification and response modulation

ldquoIf you get two or three decisions wrong you find you might not take a risk for a

month until you build up your confidence There‟s definitely a lot of confidence

involvedrdquo 104 high experience low pay

ldquoI try and keep my emotions under tight controlrdquo 105 high experience low pay

There is a marked contrast in the discourse of the high performing traders who often

showed a greater willingness to reflect on their emotion-driven behavior (the two exceptions to

this were traders with whom we had only short interviews with little opportunity for extended

reflection rather than any denial of the role of emotion) Emotion regulation for these traders

tended to focus mainly on how they directed their attention (attentional deployment) and how

they framed experiences of loss and gain (cognitive change)

ldquoBig losses and big gains can swap around fairly quickly and once you understand

that then you stop concentrating on the loss and you start concentrating more on how

to make money back hellip One big trade is not going to make anyone and one big loss

doesn‟t destroy yourdquo 15 high experience high pay

ldquoExperience definitely helps having traded through the crash etc Youve seen

different scenarios and newer people its like oh my god its the end of the world

whereas there is life after death and so I think that type of experience helps It doesnt

18

necessarily help the new situation on what to do but it just helps your judgmentrdquo 55

high experience high pay

There was a notable absence of avoidant behavior in this group Several participants told

stories which implied a significant degree of persistence in the face of negative emotion

ldquoI had one very bad year from which I learned quite a lot I learned that the

overshooting can go on for a very long time it can be very painful you can hit risk

limits hellip I did not want to get out of the trades so kept the trades and then next year

they made more money than they lost I don‟t think I panicked but I was getting calls

from the CEO Reason prevailed in the end Emotionally it was not easy to cope

with There were times when the desk was down close to $100m I lost almost that

much in days I was under a lot of pressure from New York because they did not

understand my positions but in the end we managed to keep the positions and made

money the next year The hardest thing was persuading others that I had a good

traderdquo 14 high experience high pay

This willingness among some of the high performing traders to experience negative

emotion in order to achieve longer term goals is consistent with Labouvie-Vieflsquos (2003)

argument that positive self-development requires not just strategies to optimize positive affect

but also the ability to tolerate tension and negativity to achieve long term goals

However there may be another important reason why response modulation strategies are

maladaptive for traders As we have seen above while poorly regulated emotions carry over to

subsequent trading and risk biasing subsequent trading behavior emotion cues generated by

reactions to information relevant to current trading under time constraints play an important role

in guiding attention and rapidly choosing appropriate action Both poor regulation of non-

19

relevant emotions and recourse to the attempted suppression of all feeling run the risk of masking

these important cues

The Role of Managers in Emotion Regulation

Further evidence of the importance of emotions and their regulation to trader performance

came from interviews with trader managers A few managers described their role in primarily

technical terms focusing on risk management and personal supervision of problematic trades

However many of those we interviewed clearly saw regulating the emotions of traders who

worked for them as a key element in managing trader performance

ldquoI have to play the role of director of emotions in the sense that when they are down

you have to boost their morale and when they are too excited they want to do stupid

things I have to cool them downrdquo 119 senior manager

ldquoI care deeply because I have tremendous pride in the people herehellipThe stress is

generated by fear entirely and it‟s fear of what I guess everyone has their

insecurities whether it‟s being fired losing lots of money and appearing stupid in

front of their peer group Whatever it is it‟s definitely fear and if you can take the

fear out of the situation they perform betterrdquo 123 senior trader manager high

experience high pay

Many traders described such episodes of managerial intervention as crucial to their

learning and development For example-

ldquoI lost $1m in the first 10 days of the year This was at a time when if you made $1m

in a year that was huge I was devastated and my boss asked me for lunch at the

weekend - I thought that was the end of my career My boss said bdquoa lot of the guys

think you‟re OK but they are worried you are going to be afraid to trade that you‟re

20

going to be gun shy and lose your confidence We want you to know that we like you

and if you think you‟ve got to buy them buy them and if you‟ve got to sell them sell

them but whatever you do don‟t stop trading‟ So that was a huge relief Since then I

don‟t get too depressed about losing money although there are always good days

and bad daysrdquo 25 low experience medium performance

Other managers clearly gave thought to the relative strengths and weaknesses of more

intuitive versus more analytical traders in their decisions about matching traders to roles -

ldquoA gut trader should trade a liquid market - he might change his feel so he needs to

get out The analytical trader who thinks much more about what he‟s doing will

change their mind less often and trade with a different time frame A gut trader can

be bullish in the morning The analytical trader will look at something for a week

and then put on a position - less important to get in and out He doesn‟t need to be in

a liquid market - in an emerging market you need a more analytical traderrdquo 122

Manager

ldquoDerivatives are very quantitative and people think if you have a PhD you will be

very good because you have an understanding of options theory but this is not

always the case and you tend to overlook things Although you can put the

parameters into the model there are still a lot of things which are uncertain

Sometimes adding a more qualitative feel to it ndashbdquoyes that‟s what the model says but

the risk doesn‟t look right‟ hellip I tend to have a mixture of people on the desk - those

who are more quantitative and those who are more common sense or gut instinct

traders Having the blend is quite useful for bouncing ideasrdquo 124 Manager

These reflections have implications for management strategies in trading environments or

indeed any others where the main role of the operative is complex decision-making under

21

constraints of time and uncertain and incomplete information We consider these points further in

our discussion

Emotional Cues and the Use of Intuition

The second broad theme concerned the role of emotional cues in traderslsquo decision-

making Many of the traders discussed this aspect of emotion as intuition Traderslsquo own accounts

and conceptualizations of intuition fit well with Dane and Prattlsquos (200740) definition of intuition

as ―affectively charged judgments that arise through rapid non-conscious and holistic

associations For example -

ldquo[W]ithout a doubt some of the best bargains are the ones you dont do You know

theyre bad bargains You know It‟s a gut feel Youve looked at the playing field and

you just know this is a bad bargainrdquo 106 high experience moderate pay

Some of the traders see a more subtle and sophisticated role for emotions which represent

an unconscious drawing on experience -

ldquoI think many people do say theyre gut-feel traders but perhaps theyre not analyzing

what theyre actually thinking and theyre seeing a lot of customer flow and a lot of

buyers and they probably dont necessarily realize the reasons why they want to buy

But there are very good traders that say theyre trading off gut feel that I believe

actually have probably reasonable information reasonable thoughts behind it but

they wouldnt literally toss a coinrdquo 55 high experience high pay

Feelings are also seen as a kind of radar directing attention and shaping perceptions

around opportunities to enable them to be promptly seized

ldquoI think what a trader has to have is not necessarily this gut feeling but this nose for

opportunities If an opportunity comes along you have to be able to spot it and see it

22

and sometimes people you typically find in this business - an opportunity is there and

they cant see it and then its taken by someone else and its like oh yeah that was a

good idea but it is gonerdquo 58 high experience low pay

Not only do feelings act as a kind of radar directing attention but they do so in a way that

enables rapid decision making under time pressure As one trader noted -

ldquoTrading includes stuff which is beyond trading Trading is when you make decisions

involving financial risk that have two qualities you have to make them in someone

else‟s time schedule not your own and when you make a decision you have to be

confident when you have incomplete or imperfect information and therefore there

must be some kind of intuitive or qualitative elementrdquo 121 high experience high pay

Experienced traders made much more reference to intuition or gut feellsquo as they often

phrased it than less experienced traders However again there were important differences

between low and high paid traders in the high experience group Low paid traders who talked

about the use of intuition often talked of it in terms of a rather mysterious process You either had

a feeling or not For example

ldquoIt‟s almost like a sixth sense Something comes over you and you feel like - yes I

know they‟re going to be looking to buy these later on or looking to sell these later

onrdquo 116 high experience low pay

By contrast the top paid group tended to reflect critically about the origins of their

intuitions and to bring them together with more objective information -

ldquoIf I do fancy a stock - you have a feeling it feels right it has done nothing for like

two or three months and you‟ve seen sellers and they start to dwindle and it is just

stagnant and then you have a look on the charts you refer to the technical side as

well as the emotional side of the trade So you know a combination of technical and

23

emotional as well as what the analyst thinks as well so you sort of bring the

instruments you have available to you to make the decision rather than the snap

[snaps his finger] I fancy buying thatrdquo 101 high experience high pay

ldquoI may examine opportunities based on intuition that something is going to happen

but the decision is based on something I think is rationalrdquo 68 medium experience

high pay

Reported use of intuition does seem to increase with trader experience However traderslsquo

engagement with their feelings is qualitatively different between low and high performers High

performing traders seem to engage with their intuitions at a meta-cognitive level and make

judgments about the relevance of these feelings to the decision at hand This is consistent with

the growing literature on expertise which points to experience as a necessary but insufficient

condition for the development of expertise and points to the role of extended critical engagement

with practice in developing expertise (Ericsson 2006 Ericsson Krampe amp Tesch-Roemer

1993)

Traders were not universally positive about the role of intuition in market decision making

Some believed reliance on such feelings yields poor outcomes -

ldquoMany traders feel that models have been developed by academics who do not know

markets and [traders] think that gut feeling is more important My experience is that

this is 100 wrong and computers can make better decisions than tradersrdquo 37

medium experience medium pay

Overall however the data support a picture of expert traders having a meta-cognitive

engagement with emotion regulation This process entails discrimination between emotions in

terms of their relevance to the decision at hand and effective strategies for emotion regulation to

enhance performance

24

Empathy

The third identified theme was empathy monitoring own emotions as information

about what other market players might be feeling Only five traders explicitly described

using their own capacity for empathy as a decision making tool Although not frequent in

our data these examples are important illustrating that there is a path for traders beyond

simply seeking to eliminate or reduce the intensity of their emotions These traders

fostered feelings as a source of information about other market actors which they managed

and used in a self-aware analysis One trader described using his own fear as an indicator

of fear in the market Another described actively imagining the feelings of other market

actors ―trying to put myself in [the Bank of England Governorlsquos] feet to develop a feel for

how he feels and thinks 14 high experience high pay

Three traders talked about an emotional affinity with the feelings of people in

national markets (Spain 34 high experience medium pay Italy 70 medium experience

low pay and Japan 117 high experience medium pay) with whom they shared a common

culture and propensity to react emotionally in similar ways to the same market events This

group was small but these data broaden the picture of traders reasoning with emotionlsquo

and offer a potentially rich and fruitful avenue for future research

DISCUSSION AND CONCLUSIONS

To ask whether emotion disturbs or aids traderslsquo decision-making is to ask the wrong

question Traderslsquo emotions and cognition are inextricably linked Therefore a more productive

question to ask in this context is whether there are more or less effective strategies for managing

and using emotion in financial decision-making This has been the thrust of our analysis which

25

sought to move beyond previous work that simply characterizes emotional arousal as detrimental

to performance (eg Lo et al 2005 Schunk and Bersh 2006) The study contributes to our

understanding of the role of emotions in work and decision-making in several distinct ways In

contributing to our understanding of the role of emotion at work this study has particular

relevance in that it considers a work domain which has been theorized as strongly normatively

rational as opposed to a work domain (such as negotiation or customer service) where

performance is primarily dependent on effective social interaction However it is clear from this

study that even within such an analysis-intensive domain as financial trading emotion plays a

central role Traders and their managers are frequently preoccupied with the effective regulation

and use of emotions in their work Our work points to the value of a more nuanced understanding

which considers the role of emotions in decision-making the differential impact of various

emotion regulation strategies the conditions under which gut-feellsquo may support effective

decision-making and the role of empathic responses in understanding the behavior of other

market actors

Effective emotion regulation seems to be a critical success factor in trading for our

findings suggest that the strategies for emotion regulation adopted by expert higher performing

traders are qualitatively different from those of lower performing traders In particular higher

performers are more inclined to regulate emotions through attentional deployment and cognitive

change and may display a willingness to cope with negative feelings in the interests of

maintaining objectivity and pursuing longer term goals The kind of attention and appraisal-

focused emotion regulation strategies used by high-performing traders do not seem to be too

cognitively expensive and are effective in reducing negative experience of emotion (Gross

2002) By contrast less expert traders engage either in avoidant behaviors such as walking

away from the desk or invest significant cognitive effort in modulating their emotional

26

responses This extends previous findings (eg Grandey 2003) concerning the performance

benefits of antecedent versus response-focused emotion regulation in the context of emotion

labor to the very different context of financial decision-making Our findings also suggest that

willingness to endure negative feelings in pursuit of long-term goals may be more adaptive than

purely defensive strategies aimed at maintaining positive feelings (Labouvie-Vief 2003 Tamir

2005)

This study also provides evidence that more effective emotion regulation strategies can be

learned in a financial decision-making context While an individuallsquos preferred approach to

emotion regulation is likely to be influenced by personality traits neuroticism and extroversion in

particular (Gross amp John 2003) our interviews with traders and their managers also point to the

importance of traderslsquo learned strategies for emotion regulation Importantly our study also

suggests that defensive emotion regulation strategies may be problematic because they reduce

opportunities to exercise expert intuition

These findings go well beyond prior research on emotion regulation and performance

(eg Grandey 2003) which has a primary focus on performance in the context of interpersonal

interaction Our findings uniquely address the performance of professional traders for whom

performance is not primarily dependent on interpersonal interaction and which has been

theorized as strongly rational involving the selection of optimal strategies in the face of complex

cognitive demands and requiring attention to a large volume of information with uncertain

relevance

Turning to intuition traders in our study mirror the balance of opinion in the research

literature on intuition They are equivocal about whether feelings and hunches about appropriate

courses of action lead to better or worse outcomes than purely rational analysis There were

strong feelings on both sides with traders being quite evenly divided between the two camps

27

However again our study suggests the importance of a more nuanced approach than simply

asking whether reliance on intuition is good or bad and points towards the conditions in which

reliance on intuitive judgment may be more and less effective The findings suggest that one

characteristic of higher performing traders may be a greater willingness to reflect critically about

their intuitions and feelings about trading These traders often reported relying on intuition but

they tend to weigh their feelings critically alongside other evidence and to reflect about the

provenance of those feelings Lower performing traders may rely on feelings alone and show

less propensity to think critically about the source of hunches This reflection by expert traders

about the provenance of feelings may be particularly salient given Schwarz and Clorelsquos (1983

2003) finding that the impact of emotions on behavior is reduced or disappears when the

relevance of those emotions is explicitly called into question

That traderslsquo reliance on affective cues in decision-making can support effective

performance is consistent with Damasiolsquos observation that deciding advantageously depends on

the use of affective cues in both learning and deciding (Bechara et al 1997 Damasio 1994)

There is increasing evidence that humans are naturally proficient in the ability to acquire

expertise and that encapsulation of experience in expert intuition and perception via system one

provides a means of by-passing cognitive limits (Ericsson 2006) The nature of expertise could

counteract the inherent environmental uncertainties that Tiedens and Linton (2001) identified as

leading to more conscious appraisal of information While not an unequivocal result our finding

of greater critical engagement among higher performing traders with intuitions and their more

sophisticated deployment of intuition in combination with analysis suggests an important

direction for future research

The small number of accounts of traders monitoring their own emotions as a source of

information about the emotions of other market actors was intriguing These data suggest a

28

possibly productive avenue for future research We do not have evidence of performance

outcomes of predictive uses of empathy in this manner but our findings are consistent with

arguments that the evolution of the human brain has been significantly driven by the need to

predict the behavior of other humans often via subtle cues (eg Nicholson 2000)

We suggest that the identification of links between decision-making performance and

emotion regulation in this study has important implications for theory development in two key

fields First while somewhat tacit in much of the literature the implication of many claims in the

decision-making and behavioral finance literatures is that a range of key decision-making biases

are underpinned by mechanisms which involve emotion processes One relevant explicit example

is Thalerlsquos (1985 1999) account of the role of hedonic editinglsquo in mental accounting and the

disposition effect (the tendency to hold losing assets longer than winning assets) This explains

key biases in terms of the desire to maintain positive hedonic tone There is evidence too of

interpersonal variation in propensity to exhibit such biases for example investors vary in their

propensity to exhibit the disposition effect (Shapira amp Venezia 2001 Weber amp Welfens 2008)

In this study we have seen that traders seek to regulate emotions in order to avoid decision biases

and that higher performing traders typically exhibit more sophisticated emotion regulation

strategies This suggests that it would be productive to investigate the role of emotion regulation

as one key source of interpersonal variation in susceptibility to a range of decision biases

A second implication concerns the role of emotion in expert performance While much

attention has been paid to the nature of cognition in expert performance the expertise literature

hardly considers the role of emotion For example examining the index of the Cambridge

Handbook of Expertise and Expert Performance (Ericsson et al 2006) reveals very few

references to emotion and these are peripheral to the main arguments of the chapters which

contain them Our research suggests first that effective emotion regulation may be an important

29

facet of expert performance and second that greater attention should be paid to the interactions

between emotion emotion regulation and expert intuition Further research could test the

proposition that effective expert intuition is reduced by reliance on defensive emotion regulation

strategies

While our study points to the importance of intuition in traderslsquo work it may be that the

relative importance of intuition and analysis vary with task characteristics such as time span of

decision-making Certainly this seemed to be the view of several senior managers with

responsibility for allocating traders to trading roles The interplay that expert traders described

between intuition and analysis is also intriguing The importance of context to the role of affect

in decision-making has been noted in prior research (Forgas amp George 2001) Further research

could usefully explore this aspect of traderslsquo expertise

This study also contains some potentially important implications for practice First it

points to the importance of learned strategies for emotion regulation and the need for effective

support for their development Second our data directly and indirectly point to the key role of

management in this process Our findings suggest that there may be considerable benefits to

skilled managerial interventions that help to steer effective emotion regulation and support

inexperienced traders in developing emotion regulation skills Additionally managers may be

able to help traders to understand the productive role that critically engaged experience-based

intuition may play in decision-making Our evidence suggests that many high performing traders

deploy a reflective and critical approach to the use and development of intuition well-founded in

experience Managers could help to guide this process through coaching The contextual

dependence of high quality intuitions suggests they are quite domain specific and may not

transfer across contexts As several informants told us this is especially true for traders operating

under different market conditions

30

We heard repeated concerns from senior managers who worried about traders who had

not seen a bear market and would not operate well when that occurred We also heard many

stories of people transferring between trading areas and needing time to re-contextualize

expertise before their intuitions could be considered reliable Thus managers have a role in

helping traders to extend the boundaries of their expertise Given recent events in financial

markets our findings may be relevant to an understanding of how traders react under massively

changed trading conditions and how those reactions might either contribute to or result from

market volatility

This research has some important limitations First although we have argued for the

importance of an account of emotion that includes the experience of emotion as Pham (2004

368) notes the affective system is focused on the present Thus people can be poor at recalling or

predicting emotions There are limits to the human capacity to introspect on emotion processes

and to recall the experience of emotion These limits are also subject to wide individual

differences The capacity for introspection and recall will also vary between individuals For this

reason studies such as ours need to be complemented with more physiologically based research

as well as further qualitative and quantitative studies

Second as in all work contexts traders subscribe to norms of socially sanctioned

behavior and to common narratives about the nature of their work We have not treated emotional

labor as a primary component of traderslsquo work and performance The majority of work

interactions are carried out through highly abbreviated electronic exchanges which provide a poor

medium for the communication of emotion However there is a sense in which traders engage in

emotional labor since especially for novices there are social pressures to comply with display

rules which emphasize the avoidance of displays of strong emotion One common narrative

thread that ran though many traderslsquo accounts of their work was a representation of trading work

31

as principally concerned with rational analysis from which emotions are a dangerous distraction

This narrative seemed particularly strong in the accounts of less experienced traders Although as

we have seen the mask would often slip as they discussed their work Some traderslsquo accounts

were clearly colored by a desire to conform to this mode of self-presentation In consequence it is

possible that in our interviews and during data analysis we were at times unable to distinguish

effectively between defensive denial of emotion and effective regulation of emotion This would

be another avenue for future research

To conclude we know that emotions are a rich source of experience in everyday life but

at the same time in work contexts they can be a source of vulnerability a wayward influence over

judgment and a source of disturbance to process The more ―rational-economic such

environments are the more likely we are to hold such beliefs (Nicholson 2000) Our research

illustrates that this position is false or at best short-sighted In the hyper-rational world of

trading in financial markets we did find some evidence that emotions disturbed performance but

mostly among the inexperienced and un-reflective traders The best traders are able to regulate

emotions effectively and incorporate relevant emotions as information ndash signals or a kind of

radar that contain information about risks what is going on in the minds of others and the weight

and relevance to be accorded to onelsquos own past experience

32

REFERENCES

Bargh J A Chen M amp Burrows L (1996) Automaticity of social behavior Direct effects of

trait construct and stereotype activation on action Journal of Personality and Social

Psychology 71 230-244

Baumeister R F Bratslavsky E Muraven M amp Tice D M (1998) Ego depletion Is the

active self a limited resource Journal of Personality and Social Psychology 74 1252-

1265

Bechara A Damasio A Tranel D amp Damasio A R (1997) Deciding advantageously before

knowing the advantageous strategy Science 275 1293-1295

Bower G H (1981) Mood and memory American Psychologist 36 129 ndash 148

Bower G H (1991) Mood congruity of social judgments In J P Forgas (Ed) Emotion and

social judgments (pp 31ndash53) Oxford Pergamon Press

Braun V amp Clarke V (2006) Using thematic analysis in psychology Qualitative Research in

Psychology 3(2) 77-101

Buck R (1999) The biological affects a typology Psychological Reveiw 106 301-336

Damasio A R (1994) Descartes‟ error Emotion reason and the human brain New York

Putnam

Dane E amp Pratt M G (2007) Exploring intuition and its role in managerial decision making

The Academy of Management Review 32 33-54

De Bondt W Palm F amp Wolff C (2004) Introduction to the special issue on behavioral

finance Journal of Empirical Finance 11 423-427

Dreyfus H amp Dreyfus S (2005) Expertise in real world contexts Organization Studies 26

779-792

Epstein S Pacini R Denes-Raj V amp Heier H (1996) Individual differences in intuitive-

experiential and analytical-rational thinking styles Journal of Personality and Social

Psychology 71 390-405

Ericsson K A Krampe R T amp Tesch-Roemer C (1993) The role of deliberate practice in the

acquisition of expert performance Psychological Review 100 363-406

Ericsson K A (2006) An introduction to the Cambridge Handbook of Expertise and Expert

Performance its development organization and content In K A Ericsson amp N Charness

amp P J Feltovich amp R R Hoffman (Eds) The Cambridge Handbook of Expertise and

Expert Performance 1st ed 3-20 Cambridge Cambridge University Press

Fama E F (1991) Efficient Capital Markets II The Journal of Finance 46 1575-1617

Fama E F (1998) Market efficiency long-term returns and behavioral finance Journal of

Financial Economics Vol 49 283-306

Fenton-OCreevy M Nicholson N Soane E amp Willman P (2005) Traders Risks Decisions

and Management in Financial Markets Oxford Oxford University Press

Finucane M L Alhakami A Slovic P amp Johnson S M (2000) The affect heuristic in

judgments of risks and benefits Journal of Behavioral Decision Making 13(1) 1-17

Forgas JP amp George JM (2001) Affective influences on judgments and behavior in

organizations An information processing perspective Organizational Behavior and

Human Decision Processes 86(1) 3-34

Grandey AA (2000) Emotion Regulation in the Workplace A new way to conceptualize

Emotional Labor Journal of Occupational Health Psychology 5(1) 95-110

33

Grandey A A (2003) When the show must go on surface acting and deep acting as

determinants of emotional exhaustion and peer-rated service delivery Academy of

Management Journal 46 86-96

Gray JA (1999) Cognition emotion conscious experience and the brain In T Dalgleish and

MJ Power (Eds) Handbook of Cognition and Emotion (pp83-102) Chichester England

Wiley

Gross J (2002) Emotion regulation affective cognitive and social consequences

Psychophysiology 39 281

Gross J J amp John O P (2003) Individual differences in two emotion regulation processes

Implications for affect relationships and well-being Journal of Personality and Social

Psychology 85(2) 348-362

Gross J J amp Thompson R A (2007) Emotion regulation Conceptual foundations In J J

Gross (Ed) Handbook of emotion regulation New York NY Guilford Press

Isen A M Shalker T E Clark M amp Karp L (1978) Affect accessibility of material in

memory and behavior A cognitive loop Journal of Personality and Social Psychology

36 1-12

Johnson E amp Tversky A (1983) Affect generalization and the perception of risk Journal of

Personality and Social Psychology 45(1) 20-31

Kavanaugh D amp Bower G (1985) Mood and self-efficacy Impact of job and sadness on

perceived capabilities Cognitive Therapy and Research 9 507-525

Klein G A Calderwood R amp Clinton Cirocco A (1986) Rapid decision-making on the

fireground Human Factors and Ergonomics Society 30th Annual Meeting Vol 1 576-

580

Knorr-Cetina K amp Brugger U (2002) Traders Engagement with Markets A Postsocial

Relationship Theory Culture and Society 19(5-6) 161-185

Labouvie-Vief G (2003) Dynamic integration Affect cognition and the self in adulthood

Current Directions in Psychological Science 12 201-206

Lerner J S amp Keltner D (2001) Fear anger and risk Journal of Personality and Social

Psychology 81(1) 146-159

Lerner J S Small D A amp Loewenstein G (2004) Heart strings and purse strings Carryover

effects of emotions on economic decisions Psychological Science 15(5) 337-341

Lo A Repin D amp Steenbarger B (2005) Fear and greed in financial markets A clinical study

of day traders American Economic Review 95 352-359

Lo A W amp Repin D V (2002) The Psychophysiology of Real-Time Financial Risk

Processing Journal of Cognitive Neuroscience 14 323-339

MacKenzie D (2006) An Engine Not A Camera How Financial Models Shape Markets

Cambridge Mass MIT Press

Mayer JD amp Hanson A (1995) Mood-congruent judgment over time Personality and Social

Psychology Bulletin 21 237-244

Mayer JD DiPaolo M and Salovey P (1990) Perceiving affective content in ambiguous

visual stimuli a component of emotional intelligence Journal of Personality Assessment

54 772-781

Miller G (2003) The cognitive revolution a historical perspective Trends in Cognitive Science

7 141

Muraven M amp Baumeister R F (2000) Self-regulation and depletion of limited resources

Does self-control resemble a muscle Psychological Bulletin 126 247-259

Nicholson N (2000) Managing the Human Animal London ThomsonTexere

34

Peterson R L (2007) Affect and financial decision-making How neuroscience can inform

market participants The Journal of Behavioral Finance 8(2) 70-78

Pham M T (2004) The logic of feeling Journal of Consumer Psychology 14 360-369

Phelps E A (2006) Emotion and cognition Insights from studies of the human amygdala

Annual Review of Psychology 57 27-53

Sayer A (1997) Essentialism social constructionism and beyond The Sociological Review 45

453-487

Shapira Z amp Venezia I (2001) Patterns of behavior of professionally managed and

independent investors Journal of Banking and Finance 25 1573ndash1587

Schunk D amp Betsch C (2006) Explaining the heterogeneity in utility functions by individual

differences in decision modes Journal of Economic Psychology 27 386-401

Schwager J D (1993) Market Wizards Interviews with Top Traders New York Collins

Schwarz N amp Clore G L (1983) Mood misattribution and judgments of well-being

Informative and directive functions of affective states Journal of Personality and Social

Psychology 45 513-523

Seo M G Barrett L F amp Bartunek J M (2004) The role of affective experience in work

motivation Academy of Management Review 29 423-439

Seo M G amp Barrett L F (2007) Being emotional during decision makingmdashgood or bad An

empirical investigation The Academy of Management Journal 50 923-940

Shefrin H (2000) Beyond Greed and Fear Understanding Behavioral Finance and the

Psychology of Investing Boston MA Harvard Business School Press

Stokes A F Kemper K amp Kite K (1997) Aeronautical decision making cue recognition and

expertise under time pressure In C E Zsambok amp G Klein (Eds) Naturalistic Decision

Making pp 183-196 Mahwah NJ Erlbaum

Tamir M (2005) Dont worry be happy Neuroticism trait-consistent affect regulation

and performance Journal of Personality and Social Psychology 89 (3) 449 ndash

461

Thaler R H (1985) Mental accounting and consumer choice Marketing Science 4(3) 199-214

Thaler R H (1993) Advances In Behavioral Finance New York Russel Sage Foundation

Thaler R H (1999) Mental accounting matters Journal of Behavioral Decision Making 12(3)

183-206

Tiedens L amp Linton S (2001) Judgment under emotional certainty and uncertainty the effects

of specific emotions on information processing Journal of Personality and Social

Psychology 81(6) 973-988

Todd P M amp Gigerenzer G (2007) Environments that make us smart Ecological rationality

Current Directions in Psychological Science 16 167-171

Totterdell P Briner R B Parkinson B amp Reynolds S (1996) Fingerprinting time series

dynamic patterns in self-report and performance measures uncovered by a graphical non-

linear method British Journal of Psychology 87(1) 43-60

Weber M amp Welfens F (2008) Splitting the Disposition Effect Asymmetric Reactions

Towards bdquoSelling winners‟ and bdquoHolding Losers‟ Working Paper University of

Mannheim

Wright WF amp Bower GH (1992) Mood effects on subjective probability assessment

Organizational Behavior and Human Decision Processes 52 276ndash91

3

INTRODUCTION

In this paper we describe a qualitative study which develops our understanding of the role

of emotion intuition and emotion regulation in financial decision-making The study addresses

three research questions First it tests whether emotions play a significant role in decision-

making in financial trading which has been characterized as rational in the classical economic

sense A second question concerns the nature of traderslsquo own understanding of the role played by

emotion and affectively cued intuitions in their decision making performance A third question is

whether there is a link between traderslsquo emotion regulation strategies engagement with

affectively cued intuitions and decision making performance

Neo-classical financial economics has been a prime influence on research into markets

and market behavior Traders within financial markets have been understood as profit

maximizers who act on price information which summarizes all available knowledge about asset

values (Fama 1991 1998) Financial markets are designed to be transparent and have low

transaction costs such that profit opportunities are only fleetingly available and market

imperfections are eradicated (MacKenzie 2006) Within this paradigm there are strong

assumptions about investor rationality and the nature of investor preferences

Understanding of markets and market behavior has been developed by the advent of

behavioral finance (De Bondt Palm amp Wolff 2004 Thaler 1993) which has drawn upon the

insights of cognitive psychology to incorporate the ―irrational elements of cognitive biases and

collective sentiments such as herding behavior into models of financial decision making

Behavioral finance has had some success in modeling investor behavior and explaining well

known deviations of market behavior from the predictions of the efficient markets hypothesis ndash a

mainstay of the neo-classical paradigm (Fama 1991) However within this field of study the

main role accorded to emotions to date is that they are portrayed as interfering with rational

4

cognition or they are seen as outcomes of the decision process affecting anticipated utility In

neither case are they acknowledged as integral and primary in their effects on choice and action

(eg Shefrin 2000 Peterson 2007) The trader practitioner literature though is full of references

to emotion and market sentimentlsquo For example -

ldquoTrading is emotion It is mass psychology greed and fearrdquo (Marcus in Schwager

1993 49)

Despite renewed interest in emotions and emotion regulation in the workplace applied

empirical work in field settings has been limited (Seo Barrett amp Bartunek 2004) and has largely

focused on the relatively narrow domain of emotional labor or emotions have been

decontextualized In this paper we examine the impact of traderslsquo emotions on their perceptions

behavior and performance in financial markets using interview data from 118 professional traders

and 10 senior managers in investment banks We consider traderslsquo understanding of the role of

emotion in their trading practice and seek to shed light on the ways in which traders experience

and regulate work-related emotions and how these processes change with increased expertise We

also explore the relationship between traderslsquo experience of emotion emotion regulation and

expert performance Our goal is to build a bridge between experimental and neuroscience

research into the role of emotions and rich accounts of traderslsquo lived experience of emotion in

their thinking deciding and acting (Sayer 1997)

The structure of this paper is as follows First we review relevant literature on emotions

and cognitions in decision-making and on emotion regulation including studies of traders and

investors Second we use qualitative data from interviews with traders and their managers to

address our research questions and discuss the data in relation to the literature We consider and

codify traderslsquo accounts of the role of emotion in their work and explore the relationship between

5

emotion regulation approach to engaging with intuition and trader performance Finally we

consider the theoretical and practical implications of our findings

THEORETICAL ORIENTATION

The Relationship between Emotion and Cognition

Cognition as a field of study within psychology emerged in the middle of the 20th

century

as a reaction to the dominance of behaviorism (Miller 2003) A guiding metaphor for much

cognitive psychology has been the brain-as-computer an analogy which leaves little place for

emotion except as a disturbance of optimal cognitive functioning or as a signaling system that

accompanies action and experience Thinking has been understood as quite apart from feeling In

a major review of research into the relationships between emotions and cognition Phelps (2006)

concludes that understanding the role and significance of emotion is critical to understanding

cognition It has become clear that cognition is not only affected by emotion but that emotion is

central to our cognitive functioning Current models have converged on dual processing theories

of cognition (Bechara et al 1997 Buck 1999) which suggest that decision-making is

underpinned by two parallel processes System one is rapid pattern recognition activates

emotionally weighted biases which in turn activate stored behavioral repertoires This process is

non-conscious with important parallels to perceptual processes and linked to intuitive decision

making (Dane amp Pratt 2007 Epstein et al 1996) System two the slower process involves

conscious deliberation and analysis (the executive function) facts are represented and weighed

options are generated and compared potential outcomes are modeled and learned reasoning

strategies are applied

Models of the dual process approach consider these two decision processes not as

completely separate but as interacting Conscious analysis of a situation can affect emotional

6

appraisal and immediate affective response may be one input among others into deliberation

Most of our behaviors (and associated decisions) happen in an automatic fashion with minimal

active participation by the conscious self unless we are confronted with a novel situation (Bargh

et al 1996) or uncertainty (Tiedens amp Linton 2001) The brainlsquos capacity for conscious

deliberation is limited and can be depleted much as a muscle can become exhausted (Baumeister

et al 1998 Muraven amp Baumeister 2000) Thus particularly in fast-paced and demanding

environments conscious deliberation is reserved for tasks that are accorded the highest priority

Emotions have an important role as cues to decision making Finucane et al (2000) suggest that

emotions act as a heuristic That is emotions provide an accessible summary of experience

cognitions and memories One might expect that traders given the volume of decision demands

will engage in a great deal of automatic decision making and use emotional cues There is some

empirical evidence supporting this view Lo and Repin (2002) carried out a small-scale study of

the physiological responses (blood pressure and skin conductance) of professional traders (N=10)

to actual market events They found emotional arousal to be a significant factor in the real-time

financial decision-making of both novice and experienced traders Less experienced traders

showed stronger arousal in response to short-term market fluctuations than more experienced

traders indicating that emotions are particularly important in relatively novel situations that

require cognitive effort

Emotion and Decision-Making Performance

There is evidence that emotions affect decision-making performance First there is a

range of evidence that emotions can induce biases in decision-making Emotions can skew

information retrieval For example there is evidence that it is most easy to recall experiences that

are congruent with current emotional state (Bower 1981 1991 Mayer et al 1990) Emotions

also directly bias decision-making for example fear and anger have significant (and opposite)

7

effects on risk perceptions (Lerner amp Keltner 2001 Lerner et al 2004) Additionally emotions

bias the value attached to outcomes For example intense negative emotions enhance valuation of

short-term outcomes regardless of negative long term consequences (Gray 1999) Overall

positive affect tends to be associated with optimistic decision making and negative affect with

pessimistic choices (Isen et al 1978 Johnson amp Tversky 1983 Kavanagh amp Bower 1985

Mayer amp Hanson 1995 Schwarz amp Clore 1983 Wright amp Bower 1992)

Emotions also have a role in risk-related decision making A laboratory study of financial

decision-making under risk found that low levels of emotional experience led to higher levels of

performance through greater risk neutrality due to a more constant association between objective

gain and subjective value (Schunk amp Betsch 2006) Lo et al (2005) found clear associations

between day-traderslsquo emotions their decision making and performance There was evidence that

positive decision-making outcomes as assessed by profits and losses were associated positively

with pleasant affect (eg content) and negative outcomes with unpleasant affect (eg bored)

Furthermore investors who experienced more intense positive and negative emotional reactions

to gain and loss were poorer performers than those with more attenuated emotional responses

The authors suggested that rapid emotional decision making is unsuited to the complex

information-rich environment of trading The trading practitioner literature also tends to promote

the view that emotions are detrimental to decision making exemplified in the following quotation

from highly rated trader Bruce Kovner ―Whenever a trader says bdquoI wish‟ or bdquoI hope‟ he is

engaging in a destructive way of thinking because it takes away from the diagnostic thought

process (Schwager 1993 82) In contrast Seo and Barrett (2007) carried out a study of

investment club members using an internet-based investment simulation accompanied by

emotional-state surveys They found that individuals who experienced more intense emotions

achieved higher decision-making performance

8

Thus while there is ample evidence that emotions affect decision-making performance

including for traders the evidence on the nature of that impact is mixed While there is evidence

for the biasing effect of emotions there is also evidence that we rely on emotional cues in rapid

automatic decision-making and they confer a tangible advantage to everyday decision-making

(Bechara et al 1997)

Research into the nature of expertise has tended to characterize intuition (a form of

experientially-based pattern recognition linked to the affectively cued system 1 (Dane and Pratt

2007)) as integral to expert performance ndasheg Dreyfus amp Dreyfus 2005 Klein et al 1986

Stokes et al 1997) Dane and Pratt (2007) note an important distinction between on the one

hand the decision heuristics literature which mainly supports a view of intuitive decision-

making as inferior to more rational models and on the other the literature on expertise which

emphasizes the central role of intuition in expert performance A crucial difference between these

literatures is the different emphasis placed on research method and context Research on decision

heuristics is often context free and relies heavily on experiments using subjects who are

inexperienced in the tasks studied There is also evidence that some of the key cognitive biases

identified as maladaptive products of heuristic reasoning in experimental settings either do not

occur or lead to better outcomes when decision-making is studied in the field or studied using

approaches that approximate real life contexts (Todd amp Gigerenzer 2007) The expertise

literature in contrast places great emphasis on domain specific knowledge and skills on the

development of complex cognitive schema that enable rapid associative pattern recognition and

on the activation of extensive and complex behavioral repertoires Dane and Pratt (2007) argue

that in consequence intuition will be more likely to function as an effective component of

decision-making in performance domains that require significant experience and complex domain

relevant schema a description which fits the world of financial trading

9

In summary the emotions literature gives considerable support to the idea that emotions

have multiple critical impacts on decision-making Some of these can be characterized as bias

with the potential to be detrimental to decision-making performance However it is also apparent

that there is an alternative position it is not emotions per se that are detrimental to decision-

making performance but rather that expertise and the regulation of emotions determine whether

emotions have positive or negative impacts on decision performance

Emotion Regulation

Accounts of emotions as bias focus primarily on the potential for emotions to have a

negative influence on performance By contrast accounts of emotions as information focus

primarily on the valuable role of emotions in encapsulating prior relevant experience In

principle these two perspectives may not incompatible and effective emotion regulation may

have a role in reducing the biasing effect of emotion while retaining sensitivity to the information

which emotions may carry It thus seems likely that the regulation of emotion may play an

important role in emotion performance effects Gross (2002 Gross amp Thompson 2007)

distinguishes a series of different stages in emotion episodes and five associated emotion

regulation strategies The model suggests that people both choose and modify situations

Situations require attention and appraisal which leads to an emotional response

Attempts to manage emotions may focus on any of the stages indicated in the above

model One approach to managing emotions is to select avoid or modify situations Other

approaches include focusing attention on emotionally salient elements of a situation and where

emotional responses might be difficult to cope with reframing situations to modify the emotional

response It is also possible to avoid emotional responses by refocusing attention elsewhere Each

of these strategies could lead to responses being modulated or suppressed Gross and Thompson

(2007 16) make clear that this model of emotions and their regulation is something of a

10

simplification However the model usefully illustrates the central role of emotion regulation in

decision-making

In addition to theoretical modeling there is empirical evidence for a relationship between

strategies for emotion regulation and a range of important outcomes Recent research has paid

particular attention to the difference in outcomes between antecedent-focused emotion regulation

strategies which seek to change emotions before emotion responses have become fully activated

and response-focused regulation strategies which modify behavior and emotion expression once

the emotion response is underway Emotion regulation strategies have been shown to have

differential effects on outcomes including cognitive performance health and qualities of social

interaction (Gross and Thompson 2007) In the domain of work performance much attention has

focused on the emotional labor required by customer service interactions Here emotion

regulation has been characterized as a process of deep and surface acting Surface acting is the

faking of emotion display to accord with organization display rules Deep acting involves

modifying inner feelings Grandey (2000) considers emotional labor as a subset of emotion

regulation and equates antecedent-focused and response-focused regulation with deep and surface

acting respectively In a study of front-line service workers Grandey (2003) found antecedent-

focused emotion regulation was associated with greater effectiveness in relating to customers in a

warm friendly manner while response-focused emotion regulation was associated with emotional

exhaustion and greater tendency to break character and reveal negative emotions in a service

encounter This result supports Grosslsquos earlier work (2002) There is also some evidence on

emotion regulation and financial decision-making Seo and Barret (2007) found that investors

who were better able to identify and discriminate among their current feelings achieved superior

decision-making performance They argued that this relationship was mediated by effective

regulation of the influence of feelings on their decision-making

11

In the present study we go beyond the study of emotion regulation in a context of work

performance that depends primarily on social interaction In contrast to emotional labor studies

which focus on the context of interpersonal interaction most trading nowadays (and in all cases

we studied) is conducted electronically via computer or through highly abbreviated and

formalized electronic messages with counterparties Rather than depending on appropriate

emotion display in the context of customer interaction or negotiating with counterparties trader

performance depends on selecting optimal trading strategies in the face of complex cognitive

demands and the need to process significant amounts of information with uncertain relevance

(Knorr-Cetina amp Bruegger 2002) We now turn to the present study

THE STUDY AND METHODS

The data reported in this paper were collected as part of a large multifaceted study of the

role and behavior of traders working in investment banks For this paper we have returned to this

data corpus to examine the considerable amount that traders told us about their work and

emotion an aspect touched on only superficially in previous analysis of this data (see Fenton-

OCreevy Nicholson Soane and Willman 2005 for an extended account of the study)

Participants

Participants were sampled from four leading investment banks with offices in the City of

London Three banks were American and one was European Managers in each organization were

asked to select a representative sample of traders from a range of markets trading in stocks

bonds and derivatives The mean age of participants was 3281 years (sd = 491) There was

variation in traderslsquo experience with overall tenure (including time with previous employers) in a

range from 6 months to 30 years and a mean job tenure of 780 years (sd = 558) The trader

sample comprised 116 men (983) and 2 women (17) The participants were traders in

equities bonds and derivatives most engaged in either market making or proprietary trading or

12

both We gathered information on individual trader characteristics and performance and carried

out semi-structured interviews with each trader and with a further 10 senior managers Where

traders were also managers we interviewed them twice once as a trader and once as a manager

Data

Qualitative data Interviews lasted between 30 and 90 minutes They were recorded and

transcribed in full The interviews ranged over multiple aspects of the traderslsquo roles and work

The data set for this study consisted of the portions of the interviews relevant to the role of

feelings in traderslsquo work and decision making Traders were asked to describe the range of

emotions they experienced during trading Follow-up questions encouraged them to explore the

long-term and short-term effects of emotions on their decision making and trading strategy the

role of intuition in their trading and the impact of emotions on performance Managers were

asked to describe how they evaluated and managed trader performance Again this often

produced talk about traderslsquo feelings and how they were managed

Performance data Hard performance data for traders are difficult to obtain Measures

such as value at risk trading outcomes and profit and loss are highly confidential in this setting

and were not available to us so we used total remuneration as our measure of trader performance

We felt this to be a reasonable proxy for decision-performance since a high proportion of total

remuneration is a variable annual performance linked bonus and the non-bonus elements tend to

reflect longer term financial performance in this very performance oriented sector We have

treated this variable as an indicator of expertise which Ericsson (2006) defines as reliably

superior performancelsquo Traders were asked to state their income including bonus in terms of

four categories (1 pound50000 - pound99999 (N = 4) 2 pound100000 to pound299999 (N = 41) 3 pound300000-

pound499999 (N = 34) 4 more than pound500000(N = 38) One trader declined to provide this

information

13

Analysis

The raw data were the full transcripts of all interviews We used a thematic analysis

approach which we judged to be particularly well suited to the present study As Braun and

Clarke (2006 78) note thematic analysis does not rest on a single epistemic position but can

span both realist and constructivist approaches We take the position that emotions have both a

measurable biological reality and exist in the realm of socially constructed personal experience in

which emotions have personal and social meaning

Data were open-coded by each author separately then in discussion using the NVIVO

program Common statements were identified and used as the basis for a first set of coding

categories which were subsequently refined and consolidated Coding categories were thus both

emergent from the interviews and drew on constructs identified in the literature (eg approaches

to emotion regulation) relevant to emerging themes Thus coding was both theoretical and

inductive As we analyzed the data and drew tentative conclusions we explicitly sought

disconfirming evidence to test the robustness of our insights In a later stage of analysis we

partitioned the sample into groups of low (lt5 years n=25) medium (5 to 10 years n=48) and

high experience (gt10 years N=45) and into groups of low (remunerationlt pound300k N=45) medium

(pound300k- pound500k N=34) and high expertise (gt pound500k N=38) We compare interview responses of

three specific groups inexperienced low paid traders (N=18) highly experienced but low paid

traders (N=15) and high paid traders (N=38) The remainder of the sample were medium

experience and pay There were no low experience high pay traders We chose the three

comparison groups to provide maximal contrast in differentiating the characteristics associated

with different levels of experience and expertise respectively

14

In Table 1 we summarize our key findings and the nature of the evidence for each finding

In the final column we note our sense of the strength of the evidence for each finding This

represents a qualitative conclusion arrived at though discussion between the authors and drawing

on quantity consistency importance and clarity of supporting data and existence of any

disconfirming evidence In the next section of the paper we discuss these findings and the

evidence for them in more detail Direct quotes are verbatim accompanied by the case number of

the respondent and their classification in terms of experience and pay level

TABLE 1 ABOUT HERE

TRADERSrsquo UNDERSTANDINGS OF EMOTION IN THEIR TRADING PRACTICE

Emotional experience and regulation

For many traders especially the less experienced trading is marked by significant and

persistent emotional responses to successes and setbacks It is relevant to note the distinction

between mood and emotion since both were relevant to traders Mood can be understood as a

relatively diffuse emotional climate which persists over time and not anchored to specific

situations or cognitions In contrast emotions typically have specific objects and give rise to

behavioral response tendencies relevant to those objects (Totterdell Briner et al 1996)

ldquoWhen you lose money you could sit down and cry Anybody who says you couldn‟t

isn‟t being honest with you Of course when it‟s good it‟s fantastic The highs and

lows of a trader‟s life are euphoria or absolute dismayrdquo 106 high experience

medium pay

While these emotional responses would often be triggered by specific events or series of

events in many cases the impact on mood would persist for significant periods with

consequences for subsequent trading behavior For example one manager described a trader

15

working for him as ―having been in the wilderness his confidence totally shattered for about

two years before slowly recovering from a string of losses Many talked about needing weeks or

even months to recover from the impact of major losses especially early in their careers Others

talked about the dangers of false confidence or euphoria which could persist for some time after a

big win

ldquoPeople get a bit arrogant when they have good times but this can be dangerous

because then they stop thinking as muchrdquo 18 medium experience medium pay

ldquoI tend to feel more cautious when losing moneyhellipIf I am having a down month I‟ll

look at trades which I would do if I was having a good month and say I don‟t like it

enough to take the risk on it I become more selective more risk averse and to do a

trade I need to see more than one reason why a trade will work and then might put it

on but not in a huge size When making money I can be more slack 29 high

experience high pay

However our data also suggest emotion regulation is critical to moderating the impact of

emotions on traderslsquo decision making Senior traders and trader managers frequently talked about

the way in which they had developed a capacity to regulate their own emotions and trade more

evenly regardless of success and setbacks

ldquoYou learn to be able to deal with emotions It doesn‟t get to me as much There

were situations when I was extremely stressed up and then you feel physically ill and

you really feel on the verge of throwing up But that was a long time ago and doesn‟t

happen so much now You have seen the ups and downs more You have experienced

them and in a way you are probably more prepared for it and you are aware that

every now and then it will happenhellip but it doesn‟t get to you all that much because

you are aware that it will happen 6 medium experience high pay

16

We examined emotion regulation and its relevance to performance further by considering

data from the three comparison groups (based on experience and pay) We noticed some

important differences in the way in which these groups discussed the interaction between

emotion trading and the use of intuition First there seemed to be notable differences in the

strategies employed for emotion regulation which we describe below in the language of the

Gross and Thompson model (2007) When asked directly about emotion traders in the low

experience group typically started by presenting themselves as fairly immune to the impact of

emotion on their trading However as the interview progressed they would often reveal rather

more vulnerability to emotions than they had claimed initially Take for example this trader who

had been trading for a little less than 4 years -

ldquoI‟m bit of a cold fish I don‟t think emotions greatly affect my decision-making If

you are making money you are achieving your objectivehellip

[But later]

hellipWhen you lose money it can be horrendous violent mood swings You don‟t know

what to do when you lose moneyrdquo 38 low experience low pay

There tended to be two responses types when these traders did talk about their emotions

Some in the low experience low pay group did not talk at all about actively managing their

emotions Others talked about removing themselves from situations when their emotions became

a problem (situation modification) or avoiding situations entirely which make them feel bad

(situation selection)

ldquoI think there is a strong emotional element to trading I think that anyone who‟s

doing it properly and has got their head screwed on is doing everything they can

consciously to overrule that and if I feel that I‟m trading emotionally I will walk off

17

the desk have a glass of water walk up and down the street and then come back and

make decisions when I‟m hopefully not emotionalrdquo 43 low experience low pay

Traders in the experienced group more commonly talked about strategies for emotion

regulation However the nature of these strategies tended to vary between the low paid and high

paid groups In the high experience low paid group traders seemed to find it hard to articulate

how they managed their emotions and the emotion regulation strategies they identified were

predominately situation avoidance situation modification and response modulation

ldquoIf you get two or three decisions wrong you find you might not take a risk for a

month until you build up your confidence There‟s definitely a lot of confidence

involvedrdquo 104 high experience low pay

ldquoI try and keep my emotions under tight controlrdquo 105 high experience low pay

There is a marked contrast in the discourse of the high performing traders who often

showed a greater willingness to reflect on their emotion-driven behavior (the two exceptions to

this were traders with whom we had only short interviews with little opportunity for extended

reflection rather than any denial of the role of emotion) Emotion regulation for these traders

tended to focus mainly on how they directed their attention (attentional deployment) and how

they framed experiences of loss and gain (cognitive change)

ldquoBig losses and big gains can swap around fairly quickly and once you understand

that then you stop concentrating on the loss and you start concentrating more on how

to make money back hellip One big trade is not going to make anyone and one big loss

doesn‟t destroy yourdquo 15 high experience high pay

ldquoExperience definitely helps having traded through the crash etc Youve seen

different scenarios and newer people its like oh my god its the end of the world

whereas there is life after death and so I think that type of experience helps It doesnt

18

necessarily help the new situation on what to do but it just helps your judgmentrdquo 55

high experience high pay

There was a notable absence of avoidant behavior in this group Several participants told

stories which implied a significant degree of persistence in the face of negative emotion

ldquoI had one very bad year from which I learned quite a lot I learned that the

overshooting can go on for a very long time it can be very painful you can hit risk

limits hellip I did not want to get out of the trades so kept the trades and then next year

they made more money than they lost I don‟t think I panicked but I was getting calls

from the CEO Reason prevailed in the end Emotionally it was not easy to cope

with There were times when the desk was down close to $100m I lost almost that

much in days I was under a lot of pressure from New York because they did not

understand my positions but in the end we managed to keep the positions and made

money the next year The hardest thing was persuading others that I had a good

traderdquo 14 high experience high pay

This willingness among some of the high performing traders to experience negative

emotion in order to achieve longer term goals is consistent with Labouvie-Vieflsquos (2003)

argument that positive self-development requires not just strategies to optimize positive affect

but also the ability to tolerate tension and negativity to achieve long term goals

However there may be another important reason why response modulation strategies are

maladaptive for traders As we have seen above while poorly regulated emotions carry over to

subsequent trading and risk biasing subsequent trading behavior emotion cues generated by

reactions to information relevant to current trading under time constraints play an important role

in guiding attention and rapidly choosing appropriate action Both poor regulation of non-

19

relevant emotions and recourse to the attempted suppression of all feeling run the risk of masking

these important cues

The Role of Managers in Emotion Regulation

Further evidence of the importance of emotions and their regulation to trader performance

came from interviews with trader managers A few managers described their role in primarily

technical terms focusing on risk management and personal supervision of problematic trades

However many of those we interviewed clearly saw regulating the emotions of traders who

worked for them as a key element in managing trader performance

ldquoI have to play the role of director of emotions in the sense that when they are down

you have to boost their morale and when they are too excited they want to do stupid

things I have to cool them downrdquo 119 senior manager

ldquoI care deeply because I have tremendous pride in the people herehellipThe stress is

generated by fear entirely and it‟s fear of what I guess everyone has their

insecurities whether it‟s being fired losing lots of money and appearing stupid in

front of their peer group Whatever it is it‟s definitely fear and if you can take the

fear out of the situation they perform betterrdquo 123 senior trader manager high

experience high pay

Many traders described such episodes of managerial intervention as crucial to their

learning and development For example-

ldquoI lost $1m in the first 10 days of the year This was at a time when if you made $1m

in a year that was huge I was devastated and my boss asked me for lunch at the

weekend - I thought that was the end of my career My boss said bdquoa lot of the guys

think you‟re OK but they are worried you are going to be afraid to trade that you‟re

20

going to be gun shy and lose your confidence We want you to know that we like you

and if you think you‟ve got to buy them buy them and if you‟ve got to sell them sell

them but whatever you do don‟t stop trading‟ So that was a huge relief Since then I

don‟t get too depressed about losing money although there are always good days

and bad daysrdquo 25 low experience medium performance

Other managers clearly gave thought to the relative strengths and weaknesses of more

intuitive versus more analytical traders in their decisions about matching traders to roles -

ldquoA gut trader should trade a liquid market - he might change his feel so he needs to

get out The analytical trader who thinks much more about what he‟s doing will

change their mind less often and trade with a different time frame A gut trader can

be bullish in the morning The analytical trader will look at something for a week

and then put on a position - less important to get in and out He doesn‟t need to be in

a liquid market - in an emerging market you need a more analytical traderrdquo 122

Manager

ldquoDerivatives are very quantitative and people think if you have a PhD you will be

very good because you have an understanding of options theory but this is not

always the case and you tend to overlook things Although you can put the

parameters into the model there are still a lot of things which are uncertain

Sometimes adding a more qualitative feel to it ndashbdquoyes that‟s what the model says but

the risk doesn‟t look right‟ hellip I tend to have a mixture of people on the desk - those

who are more quantitative and those who are more common sense or gut instinct

traders Having the blend is quite useful for bouncing ideasrdquo 124 Manager

These reflections have implications for management strategies in trading environments or

indeed any others where the main role of the operative is complex decision-making under

21

constraints of time and uncertain and incomplete information We consider these points further in

our discussion

Emotional Cues and the Use of Intuition

The second broad theme concerned the role of emotional cues in traderslsquo decision-

making Many of the traders discussed this aspect of emotion as intuition Traderslsquo own accounts

and conceptualizations of intuition fit well with Dane and Prattlsquos (200740) definition of intuition

as ―affectively charged judgments that arise through rapid non-conscious and holistic

associations For example -

ldquo[W]ithout a doubt some of the best bargains are the ones you dont do You know

theyre bad bargains You know It‟s a gut feel Youve looked at the playing field and

you just know this is a bad bargainrdquo 106 high experience moderate pay

Some of the traders see a more subtle and sophisticated role for emotions which represent

an unconscious drawing on experience -

ldquoI think many people do say theyre gut-feel traders but perhaps theyre not analyzing

what theyre actually thinking and theyre seeing a lot of customer flow and a lot of

buyers and they probably dont necessarily realize the reasons why they want to buy

But there are very good traders that say theyre trading off gut feel that I believe

actually have probably reasonable information reasonable thoughts behind it but

they wouldnt literally toss a coinrdquo 55 high experience high pay

Feelings are also seen as a kind of radar directing attention and shaping perceptions

around opportunities to enable them to be promptly seized

ldquoI think what a trader has to have is not necessarily this gut feeling but this nose for

opportunities If an opportunity comes along you have to be able to spot it and see it

22

and sometimes people you typically find in this business - an opportunity is there and

they cant see it and then its taken by someone else and its like oh yeah that was a

good idea but it is gonerdquo 58 high experience low pay

Not only do feelings act as a kind of radar directing attention but they do so in a way that

enables rapid decision making under time pressure As one trader noted -

ldquoTrading includes stuff which is beyond trading Trading is when you make decisions

involving financial risk that have two qualities you have to make them in someone

else‟s time schedule not your own and when you make a decision you have to be

confident when you have incomplete or imperfect information and therefore there

must be some kind of intuitive or qualitative elementrdquo 121 high experience high pay

Experienced traders made much more reference to intuition or gut feellsquo as they often

phrased it than less experienced traders However again there were important differences

between low and high paid traders in the high experience group Low paid traders who talked

about the use of intuition often talked of it in terms of a rather mysterious process You either had

a feeling or not For example

ldquoIt‟s almost like a sixth sense Something comes over you and you feel like - yes I

know they‟re going to be looking to buy these later on or looking to sell these later

onrdquo 116 high experience low pay

By contrast the top paid group tended to reflect critically about the origins of their

intuitions and to bring them together with more objective information -

ldquoIf I do fancy a stock - you have a feeling it feels right it has done nothing for like

two or three months and you‟ve seen sellers and they start to dwindle and it is just

stagnant and then you have a look on the charts you refer to the technical side as

well as the emotional side of the trade So you know a combination of technical and

23

emotional as well as what the analyst thinks as well so you sort of bring the

instruments you have available to you to make the decision rather than the snap

[snaps his finger] I fancy buying thatrdquo 101 high experience high pay

ldquoI may examine opportunities based on intuition that something is going to happen

but the decision is based on something I think is rationalrdquo 68 medium experience

high pay

Reported use of intuition does seem to increase with trader experience However traderslsquo

engagement with their feelings is qualitatively different between low and high performers High

performing traders seem to engage with their intuitions at a meta-cognitive level and make

judgments about the relevance of these feelings to the decision at hand This is consistent with

the growing literature on expertise which points to experience as a necessary but insufficient

condition for the development of expertise and points to the role of extended critical engagement

with practice in developing expertise (Ericsson 2006 Ericsson Krampe amp Tesch-Roemer

1993)

Traders were not universally positive about the role of intuition in market decision making

Some believed reliance on such feelings yields poor outcomes -

ldquoMany traders feel that models have been developed by academics who do not know

markets and [traders] think that gut feeling is more important My experience is that

this is 100 wrong and computers can make better decisions than tradersrdquo 37

medium experience medium pay

Overall however the data support a picture of expert traders having a meta-cognitive

engagement with emotion regulation This process entails discrimination between emotions in

terms of their relevance to the decision at hand and effective strategies for emotion regulation to

enhance performance

24

Empathy

The third identified theme was empathy monitoring own emotions as information

about what other market players might be feeling Only five traders explicitly described

using their own capacity for empathy as a decision making tool Although not frequent in

our data these examples are important illustrating that there is a path for traders beyond

simply seeking to eliminate or reduce the intensity of their emotions These traders

fostered feelings as a source of information about other market actors which they managed

and used in a self-aware analysis One trader described using his own fear as an indicator

of fear in the market Another described actively imagining the feelings of other market

actors ―trying to put myself in [the Bank of England Governorlsquos] feet to develop a feel for

how he feels and thinks 14 high experience high pay

Three traders talked about an emotional affinity with the feelings of people in

national markets (Spain 34 high experience medium pay Italy 70 medium experience

low pay and Japan 117 high experience medium pay) with whom they shared a common

culture and propensity to react emotionally in similar ways to the same market events This

group was small but these data broaden the picture of traders reasoning with emotionlsquo

and offer a potentially rich and fruitful avenue for future research

DISCUSSION AND CONCLUSIONS

To ask whether emotion disturbs or aids traderslsquo decision-making is to ask the wrong

question Traderslsquo emotions and cognition are inextricably linked Therefore a more productive

question to ask in this context is whether there are more or less effective strategies for managing

and using emotion in financial decision-making This has been the thrust of our analysis which

25

sought to move beyond previous work that simply characterizes emotional arousal as detrimental

to performance (eg Lo et al 2005 Schunk and Bersh 2006) The study contributes to our

understanding of the role of emotions in work and decision-making in several distinct ways In

contributing to our understanding of the role of emotion at work this study has particular

relevance in that it considers a work domain which has been theorized as strongly normatively

rational as opposed to a work domain (such as negotiation or customer service) where

performance is primarily dependent on effective social interaction However it is clear from this

study that even within such an analysis-intensive domain as financial trading emotion plays a

central role Traders and their managers are frequently preoccupied with the effective regulation

and use of emotions in their work Our work points to the value of a more nuanced understanding

which considers the role of emotions in decision-making the differential impact of various

emotion regulation strategies the conditions under which gut-feellsquo may support effective

decision-making and the role of empathic responses in understanding the behavior of other

market actors

Effective emotion regulation seems to be a critical success factor in trading for our

findings suggest that the strategies for emotion regulation adopted by expert higher performing

traders are qualitatively different from those of lower performing traders In particular higher

performers are more inclined to regulate emotions through attentional deployment and cognitive

change and may display a willingness to cope with negative feelings in the interests of

maintaining objectivity and pursuing longer term goals The kind of attention and appraisal-

focused emotion regulation strategies used by high-performing traders do not seem to be too

cognitively expensive and are effective in reducing negative experience of emotion (Gross

2002) By contrast less expert traders engage either in avoidant behaviors such as walking

away from the desk or invest significant cognitive effort in modulating their emotional

26

responses This extends previous findings (eg Grandey 2003) concerning the performance

benefits of antecedent versus response-focused emotion regulation in the context of emotion

labor to the very different context of financial decision-making Our findings also suggest that

willingness to endure negative feelings in pursuit of long-term goals may be more adaptive than

purely defensive strategies aimed at maintaining positive feelings (Labouvie-Vief 2003 Tamir

2005)

This study also provides evidence that more effective emotion regulation strategies can be

learned in a financial decision-making context While an individuallsquos preferred approach to

emotion regulation is likely to be influenced by personality traits neuroticism and extroversion in

particular (Gross amp John 2003) our interviews with traders and their managers also point to the

importance of traderslsquo learned strategies for emotion regulation Importantly our study also

suggests that defensive emotion regulation strategies may be problematic because they reduce

opportunities to exercise expert intuition

These findings go well beyond prior research on emotion regulation and performance

(eg Grandey 2003) which has a primary focus on performance in the context of interpersonal

interaction Our findings uniquely address the performance of professional traders for whom

performance is not primarily dependent on interpersonal interaction and which has been

theorized as strongly rational involving the selection of optimal strategies in the face of complex

cognitive demands and requiring attention to a large volume of information with uncertain

relevance

Turning to intuition traders in our study mirror the balance of opinion in the research

literature on intuition They are equivocal about whether feelings and hunches about appropriate

courses of action lead to better or worse outcomes than purely rational analysis There were

strong feelings on both sides with traders being quite evenly divided between the two camps

27

However again our study suggests the importance of a more nuanced approach than simply

asking whether reliance on intuition is good or bad and points towards the conditions in which

reliance on intuitive judgment may be more and less effective The findings suggest that one

characteristic of higher performing traders may be a greater willingness to reflect critically about

their intuitions and feelings about trading These traders often reported relying on intuition but

they tend to weigh their feelings critically alongside other evidence and to reflect about the

provenance of those feelings Lower performing traders may rely on feelings alone and show

less propensity to think critically about the source of hunches This reflection by expert traders

about the provenance of feelings may be particularly salient given Schwarz and Clorelsquos (1983

2003) finding that the impact of emotions on behavior is reduced or disappears when the

relevance of those emotions is explicitly called into question

That traderslsquo reliance on affective cues in decision-making can support effective

performance is consistent with Damasiolsquos observation that deciding advantageously depends on

the use of affective cues in both learning and deciding (Bechara et al 1997 Damasio 1994)

There is increasing evidence that humans are naturally proficient in the ability to acquire

expertise and that encapsulation of experience in expert intuition and perception via system one

provides a means of by-passing cognitive limits (Ericsson 2006) The nature of expertise could

counteract the inherent environmental uncertainties that Tiedens and Linton (2001) identified as

leading to more conscious appraisal of information While not an unequivocal result our finding

of greater critical engagement among higher performing traders with intuitions and their more

sophisticated deployment of intuition in combination with analysis suggests an important

direction for future research

The small number of accounts of traders monitoring their own emotions as a source of

information about the emotions of other market actors was intriguing These data suggest a

28

possibly productive avenue for future research We do not have evidence of performance

outcomes of predictive uses of empathy in this manner but our findings are consistent with

arguments that the evolution of the human brain has been significantly driven by the need to

predict the behavior of other humans often via subtle cues (eg Nicholson 2000)

We suggest that the identification of links between decision-making performance and

emotion regulation in this study has important implications for theory development in two key

fields First while somewhat tacit in much of the literature the implication of many claims in the

decision-making and behavioral finance literatures is that a range of key decision-making biases

are underpinned by mechanisms which involve emotion processes One relevant explicit example

is Thalerlsquos (1985 1999) account of the role of hedonic editinglsquo in mental accounting and the

disposition effect (the tendency to hold losing assets longer than winning assets) This explains

key biases in terms of the desire to maintain positive hedonic tone There is evidence too of

interpersonal variation in propensity to exhibit such biases for example investors vary in their

propensity to exhibit the disposition effect (Shapira amp Venezia 2001 Weber amp Welfens 2008)

In this study we have seen that traders seek to regulate emotions in order to avoid decision biases

and that higher performing traders typically exhibit more sophisticated emotion regulation

strategies This suggests that it would be productive to investigate the role of emotion regulation

as one key source of interpersonal variation in susceptibility to a range of decision biases

A second implication concerns the role of emotion in expert performance While much

attention has been paid to the nature of cognition in expert performance the expertise literature

hardly considers the role of emotion For example examining the index of the Cambridge

Handbook of Expertise and Expert Performance (Ericsson et al 2006) reveals very few

references to emotion and these are peripheral to the main arguments of the chapters which

contain them Our research suggests first that effective emotion regulation may be an important

29

facet of expert performance and second that greater attention should be paid to the interactions

between emotion emotion regulation and expert intuition Further research could test the

proposition that effective expert intuition is reduced by reliance on defensive emotion regulation

strategies

While our study points to the importance of intuition in traderslsquo work it may be that the

relative importance of intuition and analysis vary with task characteristics such as time span of

decision-making Certainly this seemed to be the view of several senior managers with

responsibility for allocating traders to trading roles The interplay that expert traders described

between intuition and analysis is also intriguing The importance of context to the role of affect

in decision-making has been noted in prior research (Forgas amp George 2001) Further research

could usefully explore this aspect of traderslsquo expertise

This study also contains some potentially important implications for practice First it

points to the importance of learned strategies for emotion regulation and the need for effective

support for their development Second our data directly and indirectly point to the key role of

management in this process Our findings suggest that there may be considerable benefits to

skilled managerial interventions that help to steer effective emotion regulation and support

inexperienced traders in developing emotion regulation skills Additionally managers may be

able to help traders to understand the productive role that critically engaged experience-based

intuition may play in decision-making Our evidence suggests that many high performing traders

deploy a reflective and critical approach to the use and development of intuition well-founded in

experience Managers could help to guide this process through coaching The contextual

dependence of high quality intuitions suggests they are quite domain specific and may not

transfer across contexts As several informants told us this is especially true for traders operating

under different market conditions

30

We heard repeated concerns from senior managers who worried about traders who had

not seen a bear market and would not operate well when that occurred We also heard many

stories of people transferring between trading areas and needing time to re-contextualize

expertise before their intuitions could be considered reliable Thus managers have a role in

helping traders to extend the boundaries of their expertise Given recent events in financial

markets our findings may be relevant to an understanding of how traders react under massively

changed trading conditions and how those reactions might either contribute to or result from

market volatility

This research has some important limitations First although we have argued for the

importance of an account of emotion that includes the experience of emotion as Pham (2004

368) notes the affective system is focused on the present Thus people can be poor at recalling or

predicting emotions There are limits to the human capacity to introspect on emotion processes

and to recall the experience of emotion These limits are also subject to wide individual

differences The capacity for introspection and recall will also vary between individuals For this

reason studies such as ours need to be complemented with more physiologically based research

as well as further qualitative and quantitative studies

Second as in all work contexts traders subscribe to norms of socially sanctioned

behavior and to common narratives about the nature of their work We have not treated emotional

labor as a primary component of traderslsquo work and performance The majority of work

interactions are carried out through highly abbreviated electronic exchanges which provide a poor

medium for the communication of emotion However there is a sense in which traders engage in

emotional labor since especially for novices there are social pressures to comply with display

rules which emphasize the avoidance of displays of strong emotion One common narrative

thread that ran though many traderslsquo accounts of their work was a representation of trading work

31

as principally concerned with rational analysis from which emotions are a dangerous distraction

This narrative seemed particularly strong in the accounts of less experienced traders Although as

we have seen the mask would often slip as they discussed their work Some traderslsquo accounts

were clearly colored by a desire to conform to this mode of self-presentation In consequence it is

possible that in our interviews and during data analysis we were at times unable to distinguish

effectively between defensive denial of emotion and effective regulation of emotion This would

be another avenue for future research

To conclude we know that emotions are a rich source of experience in everyday life but

at the same time in work contexts they can be a source of vulnerability a wayward influence over

judgment and a source of disturbance to process The more ―rational-economic such

environments are the more likely we are to hold such beliefs (Nicholson 2000) Our research

illustrates that this position is false or at best short-sighted In the hyper-rational world of

trading in financial markets we did find some evidence that emotions disturbed performance but

mostly among the inexperienced and un-reflective traders The best traders are able to regulate

emotions effectively and incorporate relevant emotions as information ndash signals or a kind of

radar that contain information about risks what is going on in the minds of others and the weight

and relevance to be accorded to onelsquos own past experience

32

REFERENCES

Bargh J A Chen M amp Burrows L (1996) Automaticity of social behavior Direct effects of

trait construct and stereotype activation on action Journal of Personality and Social

Psychology 71 230-244

Baumeister R F Bratslavsky E Muraven M amp Tice D M (1998) Ego depletion Is the

active self a limited resource Journal of Personality and Social Psychology 74 1252-

1265

Bechara A Damasio A Tranel D amp Damasio A R (1997) Deciding advantageously before

knowing the advantageous strategy Science 275 1293-1295

Bower G H (1981) Mood and memory American Psychologist 36 129 ndash 148

Bower G H (1991) Mood congruity of social judgments In J P Forgas (Ed) Emotion and

social judgments (pp 31ndash53) Oxford Pergamon Press

Braun V amp Clarke V (2006) Using thematic analysis in psychology Qualitative Research in

Psychology 3(2) 77-101

Buck R (1999) The biological affects a typology Psychological Reveiw 106 301-336

Damasio A R (1994) Descartes‟ error Emotion reason and the human brain New York

Putnam

Dane E amp Pratt M G (2007) Exploring intuition and its role in managerial decision making

The Academy of Management Review 32 33-54

De Bondt W Palm F amp Wolff C (2004) Introduction to the special issue on behavioral

finance Journal of Empirical Finance 11 423-427

Dreyfus H amp Dreyfus S (2005) Expertise in real world contexts Organization Studies 26

779-792

Epstein S Pacini R Denes-Raj V amp Heier H (1996) Individual differences in intuitive-

experiential and analytical-rational thinking styles Journal of Personality and Social

Psychology 71 390-405

Ericsson K A Krampe R T amp Tesch-Roemer C (1993) The role of deliberate practice in the

acquisition of expert performance Psychological Review 100 363-406

Ericsson K A (2006) An introduction to the Cambridge Handbook of Expertise and Expert

Performance its development organization and content In K A Ericsson amp N Charness

amp P J Feltovich amp R R Hoffman (Eds) The Cambridge Handbook of Expertise and

Expert Performance 1st ed 3-20 Cambridge Cambridge University Press

Fama E F (1991) Efficient Capital Markets II The Journal of Finance 46 1575-1617

Fama E F (1998) Market efficiency long-term returns and behavioral finance Journal of

Financial Economics Vol 49 283-306

Fenton-OCreevy M Nicholson N Soane E amp Willman P (2005) Traders Risks Decisions

and Management in Financial Markets Oxford Oxford University Press

Finucane M L Alhakami A Slovic P amp Johnson S M (2000) The affect heuristic in

judgments of risks and benefits Journal of Behavioral Decision Making 13(1) 1-17

Forgas JP amp George JM (2001) Affective influences on judgments and behavior in

organizations An information processing perspective Organizational Behavior and

Human Decision Processes 86(1) 3-34

Grandey AA (2000) Emotion Regulation in the Workplace A new way to conceptualize

Emotional Labor Journal of Occupational Health Psychology 5(1) 95-110

33

Grandey A A (2003) When the show must go on surface acting and deep acting as

determinants of emotional exhaustion and peer-rated service delivery Academy of

Management Journal 46 86-96

Gray JA (1999) Cognition emotion conscious experience and the brain In T Dalgleish and

MJ Power (Eds) Handbook of Cognition and Emotion (pp83-102) Chichester England

Wiley

Gross J (2002) Emotion regulation affective cognitive and social consequences

Psychophysiology 39 281

Gross J J amp John O P (2003) Individual differences in two emotion regulation processes

Implications for affect relationships and well-being Journal of Personality and Social

Psychology 85(2) 348-362

Gross J J amp Thompson R A (2007) Emotion regulation Conceptual foundations In J J

Gross (Ed) Handbook of emotion regulation New York NY Guilford Press

Isen A M Shalker T E Clark M amp Karp L (1978) Affect accessibility of material in

memory and behavior A cognitive loop Journal of Personality and Social Psychology

36 1-12

Johnson E amp Tversky A (1983) Affect generalization and the perception of risk Journal of

Personality and Social Psychology 45(1) 20-31

Kavanaugh D amp Bower G (1985) Mood and self-efficacy Impact of job and sadness on

perceived capabilities Cognitive Therapy and Research 9 507-525

Klein G A Calderwood R amp Clinton Cirocco A (1986) Rapid decision-making on the

fireground Human Factors and Ergonomics Society 30th Annual Meeting Vol 1 576-

580

Knorr-Cetina K amp Brugger U (2002) Traders Engagement with Markets A Postsocial

Relationship Theory Culture and Society 19(5-6) 161-185

Labouvie-Vief G (2003) Dynamic integration Affect cognition and the self in adulthood

Current Directions in Psychological Science 12 201-206

Lerner J S amp Keltner D (2001) Fear anger and risk Journal of Personality and Social

Psychology 81(1) 146-159

Lerner J S Small D A amp Loewenstein G (2004) Heart strings and purse strings Carryover

effects of emotions on economic decisions Psychological Science 15(5) 337-341

Lo A Repin D amp Steenbarger B (2005) Fear and greed in financial markets A clinical study

of day traders American Economic Review 95 352-359

Lo A W amp Repin D V (2002) The Psychophysiology of Real-Time Financial Risk

Processing Journal of Cognitive Neuroscience 14 323-339

MacKenzie D (2006) An Engine Not A Camera How Financial Models Shape Markets

Cambridge Mass MIT Press

Mayer JD amp Hanson A (1995) Mood-congruent judgment over time Personality and Social

Psychology Bulletin 21 237-244

Mayer JD DiPaolo M and Salovey P (1990) Perceiving affective content in ambiguous

visual stimuli a component of emotional intelligence Journal of Personality Assessment

54 772-781

Miller G (2003) The cognitive revolution a historical perspective Trends in Cognitive Science

7 141

Muraven M amp Baumeister R F (2000) Self-regulation and depletion of limited resources

Does self-control resemble a muscle Psychological Bulletin 126 247-259

Nicholson N (2000) Managing the Human Animal London ThomsonTexere

34

Peterson R L (2007) Affect and financial decision-making How neuroscience can inform

market participants The Journal of Behavioral Finance 8(2) 70-78

Pham M T (2004) The logic of feeling Journal of Consumer Psychology 14 360-369

Phelps E A (2006) Emotion and cognition Insights from studies of the human amygdala

Annual Review of Psychology 57 27-53

Sayer A (1997) Essentialism social constructionism and beyond The Sociological Review 45

453-487

Shapira Z amp Venezia I (2001) Patterns of behavior of professionally managed and

independent investors Journal of Banking and Finance 25 1573ndash1587

Schunk D amp Betsch C (2006) Explaining the heterogeneity in utility functions by individual

differences in decision modes Journal of Economic Psychology 27 386-401

Schwager J D (1993) Market Wizards Interviews with Top Traders New York Collins

Schwarz N amp Clore G L (1983) Mood misattribution and judgments of well-being

Informative and directive functions of affective states Journal of Personality and Social

Psychology 45 513-523

Seo M G Barrett L F amp Bartunek J M (2004) The role of affective experience in work

motivation Academy of Management Review 29 423-439

Seo M G amp Barrett L F (2007) Being emotional during decision makingmdashgood or bad An

empirical investigation The Academy of Management Journal 50 923-940

Shefrin H (2000) Beyond Greed and Fear Understanding Behavioral Finance and the

Psychology of Investing Boston MA Harvard Business School Press

Stokes A F Kemper K amp Kite K (1997) Aeronautical decision making cue recognition and

expertise under time pressure In C E Zsambok amp G Klein (Eds) Naturalistic Decision

Making pp 183-196 Mahwah NJ Erlbaum

Tamir M (2005) Dont worry be happy Neuroticism trait-consistent affect regulation

and performance Journal of Personality and Social Psychology 89 (3) 449 ndash

461

Thaler R H (1985) Mental accounting and consumer choice Marketing Science 4(3) 199-214

Thaler R H (1993) Advances In Behavioral Finance New York Russel Sage Foundation

Thaler R H (1999) Mental accounting matters Journal of Behavioral Decision Making 12(3)

183-206

Tiedens L amp Linton S (2001) Judgment under emotional certainty and uncertainty the effects

of specific emotions on information processing Journal of Personality and Social

Psychology 81(6) 973-988

Todd P M amp Gigerenzer G (2007) Environments that make us smart Ecological rationality

Current Directions in Psychological Science 16 167-171

Totterdell P Briner R B Parkinson B amp Reynolds S (1996) Fingerprinting time series

dynamic patterns in self-report and performance measures uncovered by a graphical non-

linear method British Journal of Psychology 87(1) 43-60

Weber M amp Welfens F (2008) Splitting the Disposition Effect Asymmetric Reactions

Towards bdquoSelling winners‟ and bdquoHolding Losers‟ Working Paper University of

Mannheim

Wright WF amp Bower GH (1992) Mood effects on subjective probability assessment

Organizational Behavior and Human Decision Processes 52 276ndash91

4

cognition or they are seen as outcomes of the decision process affecting anticipated utility In

neither case are they acknowledged as integral and primary in their effects on choice and action

(eg Shefrin 2000 Peterson 2007) The trader practitioner literature though is full of references

to emotion and market sentimentlsquo For example -

ldquoTrading is emotion It is mass psychology greed and fearrdquo (Marcus in Schwager

1993 49)

Despite renewed interest in emotions and emotion regulation in the workplace applied

empirical work in field settings has been limited (Seo Barrett amp Bartunek 2004) and has largely

focused on the relatively narrow domain of emotional labor or emotions have been

decontextualized In this paper we examine the impact of traderslsquo emotions on their perceptions

behavior and performance in financial markets using interview data from 118 professional traders

and 10 senior managers in investment banks We consider traderslsquo understanding of the role of

emotion in their trading practice and seek to shed light on the ways in which traders experience

and regulate work-related emotions and how these processes change with increased expertise We

also explore the relationship between traderslsquo experience of emotion emotion regulation and

expert performance Our goal is to build a bridge between experimental and neuroscience

research into the role of emotions and rich accounts of traderslsquo lived experience of emotion in

their thinking deciding and acting (Sayer 1997)

The structure of this paper is as follows First we review relevant literature on emotions

and cognitions in decision-making and on emotion regulation including studies of traders and

investors Second we use qualitative data from interviews with traders and their managers to

address our research questions and discuss the data in relation to the literature We consider and

codify traderslsquo accounts of the role of emotion in their work and explore the relationship between

5

emotion regulation approach to engaging with intuition and trader performance Finally we

consider the theoretical and practical implications of our findings

THEORETICAL ORIENTATION

The Relationship between Emotion and Cognition

Cognition as a field of study within psychology emerged in the middle of the 20th

century

as a reaction to the dominance of behaviorism (Miller 2003) A guiding metaphor for much

cognitive psychology has been the brain-as-computer an analogy which leaves little place for

emotion except as a disturbance of optimal cognitive functioning or as a signaling system that

accompanies action and experience Thinking has been understood as quite apart from feeling In

a major review of research into the relationships between emotions and cognition Phelps (2006)

concludes that understanding the role and significance of emotion is critical to understanding

cognition It has become clear that cognition is not only affected by emotion but that emotion is

central to our cognitive functioning Current models have converged on dual processing theories

of cognition (Bechara et al 1997 Buck 1999) which suggest that decision-making is

underpinned by two parallel processes System one is rapid pattern recognition activates

emotionally weighted biases which in turn activate stored behavioral repertoires This process is

non-conscious with important parallels to perceptual processes and linked to intuitive decision

making (Dane amp Pratt 2007 Epstein et al 1996) System two the slower process involves

conscious deliberation and analysis (the executive function) facts are represented and weighed

options are generated and compared potential outcomes are modeled and learned reasoning

strategies are applied

Models of the dual process approach consider these two decision processes not as

completely separate but as interacting Conscious analysis of a situation can affect emotional

6

appraisal and immediate affective response may be one input among others into deliberation

Most of our behaviors (and associated decisions) happen in an automatic fashion with minimal

active participation by the conscious self unless we are confronted with a novel situation (Bargh

et al 1996) or uncertainty (Tiedens amp Linton 2001) The brainlsquos capacity for conscious

deliberation is limited and can be depleted much as a muscle can become exhausted (Baumeister

et al 1998 Muraven amp Baumeister 2000) Thus particularly in fast-paced and demanding

environments conscious deliberation is reserved for tasks that are accorded the highest priority

Emotions have an important role as cues to decision making Finucane et al (2000) suggest that

emotions act as a heuristic That is emotions provide an accessible summary of experience

cognitions and memories One might expect that traders given the volume of decision demands

will engage in a great deal of automatic decision making and use emotional cues There is some

empirical evidence supporting this view Lo and Repin (2002) carried out a small-scale study of

the physiological responses (blood pressure and skin conductance) of professional traders (N=10)

to actual market events They found emotional arousal to be a significant factor in the real-time

financial decision-making of both novice and experienced traders Less experienced traders

showed stronger arousal in response to short-term market fluctuations than more experienced

traders indicating that emotions are particularly important in relatively novel situations that

require cognitive effort

Emotion and Decision-Making Performance

There is evidence that emotions affect decision-making performance First there is a

range of evidence that emotions can induce biases in decision-making Emotions can skew

information retrieval For example there is evidence that it is most easy to recall experiences that

are congruent with current emotional state (Bower 1981 1991 Mayer et al 1990) Emotions

also directly bias decision-making for example fear and anger have significant (and opposite)

7

effects on risk perceptions (Lerner amp Keltner 2001 Lerner et al 2004) Additionally emotions

bias the value attached to outcomes For example intense negative emotions enhance valuation of

short-term outcomes regardless of negative long term consequences (Gray 1999) Overall

positive affect tends to be associated with optimistic decision making and negative affect with

pessimistic choices (Isen et al 1978 Johnson amp Tversky 1983 Kavanagh amp Bower 1985

Mayer amp Hanson 1995 Schwarz amp Clore 1983 Wright amp Bower 1992)

Emotions also have a role in risk-related decision making A laboratory study of financial

decision-making under risk found that low levels of emotional experience led to higher levels of

performance through greater risk neutrality due to a more constant association between objective

gain and subjective value (Schunk amp Betsch 2006) Lo et al (2005) found clear associations

between day-traderslsquo emotions their decision making and performance There was evidence that

positive decision-making outcomes as assessed by profits and losses were associated positively

with pleasant affect (eg content) and negative outcomes with unpleasant affect (eg bored)

Furthermore investors who experienced more intense positive and negative emotional reactions

to gain and loss were poorer performers than those with more attenuated emotional responses

The authors suggested that rapid emotional decision making is unsuited to the complex

information-rich environment of trading The trading practitioner literature also tends to promote

the view that emotions are detrimental to decision making exemplified in the following quotation

from highly rated trader Bruce Kovner ―Whenever a trader says bdquoI wish‟ or bdquoI hope‟ he is

engaging in a destructive way of thinking because it takes away from the diagnostic thought

process (Schwager 1993 82) In contrast Seo and Barrett (2007) carried out a study of

investment club members using an internet-based investment simulation accompanied by

emotional-state surveys They found that individuals who experienced more intense emotions

achieved higher decision-making performance

8

Thus while there is ample evidence that emotions affect decision-making performance

including for traders the evidence on the nature of that impact is mixed While there is evidence

for the biasing effect of emotions there is also evidence that we rely on emotional cues in rapid

automatic decision-making and they confer a tangible advantage to everyday decision-making

(Bechara et al 1997)

Research into the nature of expertise has tended to characterize intuition (a form of

experientially-based pattern recognition linked to the affectively cued system 1 (Dane and Pratt

2007)) as integral to expert performance ndasheg Dreyfus amp Dreyfus 2005 Klein et al 1986

Stokes et al 1997) Dane and Pratt (2007) note an important distinction between on the one

hand the decision heuristics literature which mainly supports a view of intuitive decision-

making as inferior to more rational models and on the other the literature on expertise which

emphasizes the central role of intuition in expert performance A crucial difference between these

literatures is the different emphasis placed on research method and context Research on decision

heuristics is often context free and relies heavily on experiments using subjects who are

inexperienced in the tasks studied There is also evidence that some of the key cognitive biases

identified as maladaptive products of heuristic reasoning in experimental settings either do not

occur or lead to better outcomes when decision-making is studied in the field or studied using

approaches that approximate real life contexts (Todd amp Gigerenzer 2007) The expertise

literature in contrast places great emphasis on domain specific knowledge and skills on the

development of complex cognitive schema that enable rapid associative pattern recognition and

on the activation of extensive and complex behavioral repertoires Dane and Pratt (2007) argue

that in consequence intuition will be more likely to function as an effective component of

decision-making in performance domains that require significant experience and complex domain

relevant schema a description which fits the world of financial trading

9

In summary the emotions literature gives considerable support to the idea that emotions

have multiple critical impacts on decision-making Some of these can be characterized as bias

with the potential to be detrimental to decision-making performance However it is also apparent

that there is an alternative position it is not emotions per se that are detrimental to decision-

making performance but rather that expertise and the regulation of emotions determine whether

emotions have positive or negative impacts on decision performance

Emotion Regulation

Accounts of emotions as bias focus primarily on the potential for emotions to have a

negative influence on performance By contrast accounts of emotions as information focus

primarily on the valuable role of emotions in encapsulating prior relevant experience In

principle these two perspectives may not incompatible and effective emotion regulation may

have a role in reducing the biasing effect of emotion while retaining sensitivity to the information

which emotions may carry It thus seems likely that the regulation of emotion may play an

important role in emotion performance effects Gross (2002 Gross amp Thompson 2007)

distinguishes a series of different stages in emotion episodes and five associated emotion

regulation strategies The model suggests that people both choose and modify situations

Situations require attention and appraisal which leads to an emotional response

Attempts to manage emotions may focus on any of the stages indicated in the above

model One approach to managing emotions is to select avoid or modify situations Other

approaches include focusing attention on emotionally salient elements of a situation and where

emotional responses might be difficult to cope with reframing situations to modify the emotional

response It is also possible to avoid emotional responses by refocusing attention elsewhere Each

of these strategies could lead to responses being modulated or suppressed Gross and Thompson

(2007 16) make clear that this model of emotions and their regulation is something of a

10

simplification However the model usefully illustrates the central role of emotion regulation in

decision-making

In addition to theoretical modeling there is empirical evidence for a relationship between

strategies for emotion regulation and a range of important outcomes Recent research has paid

particular attention to the difference in outcomes between antecedent-focused emotion regulation

strategies which seek to change emotions before emotion responses have become fully activated

and response-focused regulation strategies which modify behavior and emotion expression once

the emotion response is underway Emotion regulation strategies have been shown to have

differential effects on outcomes including cognitive performance health and qualities of social

interaction (Gross and Thompson 2007) In the domain of work performance much attention has

focused on the emotional labor required by customer service interactions Here emotion

regulation has been characterized as a process of deep and surface acting Surface acting is the

faking of emotion display to accord with organization display rules Deep acting involves

modifying inner feelings Grandey (2000) considers emotional labor as a subset of emotion

regulation and equates antecedent-focused and response-focused regulation with deep and surface

acting respectively In a study of front-line service workers Grandey (2003) found antecedent-

focused emotion regulation was associated with greater effectiveness in relating to customers in a

warm friendly manner while response-focused emotion regulation was associated with emotional

exhaustion and greater tendency to break character and reveal negative emotions in a service

encounter This result supports Grosslsquos earlier work (2002) There is also some evidence on

emotion regulation and financial decision-making Seo and Barret (2007) found that investors

who were better able to identify and discriminate among their current feelings achieved superior

decision-making performance They argued that this relationship was mediated by effective

regulation of the influence of feelings on their decision-making

11

In the present study we go beyond the study of emotion regulation in a context of work

performance that depends primarily on social interaction In contrast to emotional labor studies

which focus on the context of interpersonal interaction most trading nowadays (and in all cases

we studied) is conducted electronically via computer or through highly abbreviated and

formalized electronic messages with counterparties Rather than depending on appropriate

emotion display in the context of customer interaction or negotiating with counterparties trader

performance depends on selecting optimal trading strategies in the face of complex cognitive

demands and the need to process significant amounts of information with uncertain relevance

(Knorr-Cetina amp Bruegger 2002) We now turn to the present study

THE STUDY AND METHODS

The data reported in this paper were collected as part of a large multifaceted study of the

role and behavior of traders working in investment banks For this paper we have returned to this

data corpus to examine the considerable amount that traders told us about their work and

emotion an aspect touched on only superficially in previous analysis of this data (see Fenton-

OCreevy Nicholson Soane and Willman 2005 for an extended account of the study)

Participants

Participants were sampled from four leading investment banks with offices in the City of

London Three banks were American and one was European Managers in each organization were

asked to select a representative sample of traders from a range of markets trading in stocks

bonds and derivatives The mean age of participants was 3281 years (sd = 491) There was

variation in traderslsquo experience with overall tenure (including time with previous employers) in a

range from 6 months to 30 years and a mean job tenure of 780 years (sd = 558) The trader

sample comprised 116 men (983) and 2 women (17) The participants were traders in

equities bonds and derivatives most engaged in either market making or proprietary trading or

12

both We gathered information on individual trader characteristics and performance and carried

out semi-structured interviews with each trader and with a further 10 senior managers Where

traders were also managers we interviewed them twice once as a trader and once as a manager

Data

Qualitative data Interviews lasted between 30 and 90 minutes They were recorded and

transcribed in full The interviews ranged over multiple aspects of the traderslsquo roles and work

The data set for this study consisted of the portions of the interviews relevant to the role of

feelings in traderslsquo work and decision making Traders were asked to describe the range of

emotions they experienced during trading Follow-up questions encouraged them to explore the

long-term and short-term effects of emotions on their decision making and trading strategy the

role of intuition in their trading and the impact of emotions on performance Managers were

asked to describe how they evaluated and managed trader performance Again this often

produced talk about traderslsquo feelings and how they were managed

Performance data Hard performance data for traders are difficult to obtain Measures

such as value at risk trading outcomes and profit and loss are highly confidential in this setting

and were not available to us so we used total remuneration as our measure of trader performance

We felt this to be a reasonable proxy for decision-performance since a high proportion of total

remuneration is a variable annual performance linked bonus and the non-bonus elements tend to

reflect longer term financial performance in this very performance oriented sector We have

treated this variable as an indicator of expertise which Ericsson (2006) defines as reliably

superior performancelsquo Traders were asked to state their income including bonus in terms of

four categories (1 pound50000 - pound99999 (N = 4) 2 pound100000 to pound299999 (N = 41) 3 pound300000-

pound499999 (N = 34) 4 more than pound500000(N = 38) One trader declined to provide this

information

13

Analysis

The raw data were the full transcripts of all interviews We used a thematic analysis

approach which we judged to be particularly well suited to the present study As Braun and

Clarke (2006 78) note thematic analysis does not rest on a single epistemic position but can

span both realist and constructivist approaches We take the position that emotions have both a

measurable biological reality and exist in the realm of socially constructed personal experience in

which emotions have personal and social meaning

Data were open-coded by each author separately then in discussion using the NVIVO

program Common statements were identified and used as the basis for a first set of coding

categories which were subsequently refined and consolidated Coding categories were thus both

emergent from the interviews and drew on constructs identified in the literature (eg approaches

to emotion regulation) relevant to emerging themes Thus coding was both theoretical and

inductive As we analyzed the data and drew tentative conclusions we explicitly sought

disconfirming evidence to test the robustness of our insights In a later stage of analysis we

partitioned the sample into groups of low (lt5 years n=25) medium (5 to 10 years n=48) and

high experience (gt10 years N=45) and into groups of low (remunerationlt pound300k N=45) medium

(pound300k- pound500k N=34) and high expertise (gt pound500k N=38) We compare interview responses of

three specific groups inexperienced low paid traders (N=18) highly experienced but low paid

traders (N=15) and high paid traders (N=38) The remainder of the sample were medium

experience and pay There were no low experience high pay traders We chose the three

comparison groups to provide maximal contrast in differentiating the characteristics associated

with different levels of experience and expertise respectively

14

In Table 1 we summarize our key findings and the nature of the evidence for each finding

In the final column we note our sense of the strength of the evidence for each finding This

represents a qualitative conclusion arrived at though discussion between the authors and drawing

on quantity consistency importance and clarity of supporting data and existence of any

disconfirming evidence In the next section of the paper we discuss these findings and the

evidence for them in more detail Direct quotes are verbatim accompanied by the case number of

the respondent and their classification in terms of experience and pay level

TABLE 1 ABOUT HERE

TRADERSrsquo UNDERSTANDINGS OF EMOTION IN THEIR TRADING PRACTICE

Emotional experience and regulation

For many traders especially the less experienced trading is marked by significant and

persistent emotional responses to successes and setbacks It is relevant to note the distinction

between mood and emotion since both were relevant to traders Mood can be understood as a

relatively diffuse emotional climate which persists over time and not anchored to specific

situations or cognitions In contrast emotions typically have specific objects and give rise to

behavioral response tendencies relevant to those objects (Totterdell Briner et al 1996)

ldquoWhen you lose money you could sit down and cry Anybody who says you couldn‟t

isn‟t being honest with you Of course when it‟s good it‟s fantastic The highs and

lows of a trader‟s life are euphoria or absolute dismayrdquo 106 high experience

medium pay

While these emotional responses would often be triggered by specific events or series of

events in many cases the impact on mood would persist for significant periods with

consequences for subsequent trading behavior For example one manager described a trader

15

working for him as ―having been in the wilderness his confidence totally shattered for about

two years before slowly recovering from a string of losses Many talked about needing weeks or

even months to recover from the impact of major losses especially early in their careers Others

talked about the dangers of false confidence or euphoria which could persist for some time after a

big win

ldquoPeople get a bit arrogant when they have good times but this can be dangerous

because then they stop thinking as muchrdquo 18 medium experience medium pay

ldquoI tend to feel more cautious when losing moneyhellipIf I am having a down month I‟ll

look at trades which I would do if I was having a good month and say I don‟t like it

enough to take the risk on it I become more selective more risk averse and to do a

trade I need to see more than one reason why a trade will work and then might put it

on but not in a huge size When making money I can be more slack 29 high

experience high pay

However our data also suggest emotion regulation is critical to moderating the impact of

emotions on traderslsquo decision making Senior traders and trader managers frequently talked about

the way in which they had developed a capacity to regulate their own emotions and trade more

evenly regardless of success and setbacks

ldquoYou learn to be able to deal with emotions It doesn‟t get to me as much There

were situations when I was extremely stressed up and then you feel physically ill and

you really feel on the verge of throwing up But that was a long time ago and doesn‟t

happen so much now You have seen the ups and downs more You have experienced

them and in a way you are probably more prepared for it and you are aware that

every now and then it will happenhellip but it doesn‟t get to you all that much because

you are aware that it will happen 6 medium experience high pay

16

We examined emotion regulation and its relevance to performance further by considering

data from the three comparison groups (based on experience and pay) We noticed some

important differences in the way in which these groups discussed the interaction between

emotion trading and the use of intuition First there seemed to be notable differences in the

strategies employed for emotion regulation which we describe below in the language of the

Gross and Thompson model (2007) When asked directly about emotion traders in the low

experience group typically started by presenting themselves as fairly immune to the impact of

emotion on their trading However as the interview progressed they would often reveal rather

more vulnerability to emotions than they had claimed initially Take for example this trader who

had been trading for a little less than 4 years -

ldquoI‟m bit of a cold fish I don‟t think emotions greatly affect my decision-making If

you are making money you are achieving your objectivehellip

[But later]

hellipWhen you lose money it can be horrendous violent mood swings You don‟t know

what to do when you lose moneyrdquo 38 low experience low pay

There tended to be two responses types when these traders did talk about their emotions

Some in the low experience low pay group did not talk at all about actively managing their

emotions Others talked about removing themselves from situations when their emotions became

a problem (situation modification) or avoiding situations entirely which make them feel bad

(situation selection)

ldquoI think there is a strong emotional element to trading I think that anyone who‟s

doing it properly and has got their head screwed on is doing everything they can

consciously to overrule that and if I feel that I‟m trading emotionally I will walk off

17

the desk have a glass of water walk up and down the street and then come back and

make decisions when I‟m hopefully not emotionalrdquo 43 low experience low pay

Traders in the experienced group more commonly talked about strategies for emotion

regulation However the nature of these strategies tended to vary between the low paid and high

paid groups In the high experience low paid group traders seemed to find it hard to articulate

how they managed their emotions and the emotion regulation strategies they identified were

predominately situation avoidance situation modification and response modulation

ldquoIf you get two or three decisions wrong you find you might not take a risk for a

month until you build up your confidence There‟s definitely a lot of confidence

involvedrdquo 104 high experience low pay

ldquoI try and keep my emotions under tight controlrdquo 105 high experience low pay

There is a marked contrast in the discourse of the high performing traders who often

showed a greater willingness to reflect on their emotion-driven behavior (the two exceptions to

this were traders with whom we had only short interviews with little opportunity for extended

reflection rather than any denial of the role of emotion) Emotion regulation for these traders

tended to focus mainly on how they directed their attention (attentional deployment) and how

they framed experiences of loss and gain (cognitive change)

ldquoBig losses and big gains can swap around fairly quickly and once you understand

that then you stop concentrating on the loss and you start concentrating more on how

to make money back hellip One big trade is not going to make anyone and one big loss

doesn‟t destroy yourdquo 15 high experience high pay

ldquoExperience definitely helps having traded through the crash etc Youve seen

different scenarios and newer people its like oh my god its the end of the world

whereas there is life after death and so I think that type of experience helps It doesnt

18

necessarily help the new situation on what to do but it just helps your judgmentrdquo 55

high experience high pay

There was a notable absence of avoidant behavior in this group Several participants told

stories which implied a significant degree of persistence in the face of negative emotion

ldquoI had one very bad year from which I learned quite a lot I learned that the

overshooting can go on for a very long time it can be very painful you can hit risk

limits hellip I did not want to get out of the trades so kept the trades and then next year

they made more money than they lost I don‟t think I panicked but I was getting calls

from the CEO Reason prevailed in the end Emotionally it was not easy to cope

with There were times when the desk was down close to $100m I lost almost that

much in days I was under a lot of pressure from New York because they did not

understand my positions but in the end we managed to keep the positions and made

money the next year The hardest thing was persuading others that I had a good

traderdquo 14 high experience high pay

This willingness among some of the high performing traders to experience negative

emotion in order to achieve longer term goals is consistent with Labouvie-Vieflsquos (2003)

argument that positive self-development requires not just strategies to optimize positive affect

but also the ability to tolerate tension and negativity to achieve long term goals

However there may be another important reason why response modulation strategies are

maladaptive for traders As we have seen above while poorly regulated emotions carry over to

subsequent trading and risk biasing subsequent trading behavior emotion cues generated by

reactions to information relevant to current trading under time constraints play an important role

in guiding attention and rapidly choosing appropriate action Both poor regulation of non-

19

relevant emotions and recourse to the attempted suppression of all feeling run the risk of masking

these important cues

The Role of Managers in Emotion Regulation

Further evidence of the importance of emotions and their regulation to trader performance

came from interviews with trader managers A few managers described their role in primarily

technical terms focusing on risk management and personal supervision of problematic trades

However many of those we interviewed clearly saw regulating the emotions of traders who

worked for them as a key element in managing trader performance

ldquoI have to play the role of director of emotions in the sense that when they are down

you have to boost their morale and when they are too excited they want to do stupid

things I have to cool them downrdquo 119 senior manager

ldquoI care deeply because I have tremendous pride in the people herehellipThe stress is

generated by fear entirely and it‟s fear of what I guess everyone has their

insecurities whether it‟s being fired losing lots of money and appearing stupid in

front of their peer group Whatever it is it‟s definitely fear and if you can take the

fear out of the situation they perform betterrdquo 123 senior trader manager high

experience high pay

Many traders described such episodes of managerial intervention as crucial to their

learning and development For example-

ldquoI lost $1m in the first 10 days of the year This was at a time when if you made $1m

in a year that was huge I was devastated and my boss asked me for lunch at the

weekend - I thought that was the end of my career My boss said bdquoa lot of the guys

think you‟re OK but they are worried you are going to be afraid to trade that you‟re

20

going to be gun shy and lose your confidence We want you to know that we like you

and if you think you‟ve got to buy them buy them and if you‟ve got to sell them sell

them but whatever you do don‟t stop trading‟ So that was a huge relief Since then I

don‟t get too depressed about losing money although there are always good days

and bad daysrdquo 25 low experience medium performance

Other managers clearly gave thought to the relative strengths and weaknesses of more

intuitive versus more analytical traders in their decisions about matching traders to roles -

ldquoA gut trader should trade a liquid market - he might change his feel so he needs to

get out The analytical trader who thinks much more about what he‟s doing will

change their mind less often and trade with a different time frame A gut trader can

be bullish in the morning The analytical trader will look at something for a week

and then put on a position - less important to get in and out He doesn‟t need to be in

a liquid market - in an emerging market you need a more analytical traderrdquo 122

Manager

ldquoDerivatives are very quantitative and people think if you have a PhD you will be

very good because you have an understanding of options theory but this is not

always the case and you tend to overlook things Although you can put the

parameters into the model there are still a lot of things which are uncertain

Sometimes adding a more qualitative feel to it ndashbdquoyes that‟s what the model says but

the risk doesn‟t look right‟ hellip I tend to have a mixture of people on the desk - those

who are more quantitative and those who are more common sense or gut instinct

traders Having the blend is quite useful for bouncing ideasrdquo 124 Manager

These reflections have implications for management strategies in trading environments or

indeed any others where the main role of the operative is complex decision-making under

21

constraints of time and uncertain and incomplete information We consider these points further in

our discussion

Emotional Cues and the Use of Intuition

The second broad theme concerned the role of emotional cues in traderslsquo decision-

making Many of the traders discussed this aspect of emotion as intuition Traderslsquo own accounts

and conceptualizations of intuition fit well with Dane and Prattlsquos (200740) definition of intuition

as ―affectively charged judgments that arise through rapid non-conscious and holistic

associations For example -

ldquo[W]ithout a doubt some of the best bargains are the ones you dont do You know

theyre bad bargains You know It‟s a gut feel Youve looked at the playing field and

you just know this is a bad bargainrdquo 106 high experience moderate pay

Some of the traders see a more subtle and sophisticated role for emotions which represent

an unconscious drawing on experience -

ldquoI think many people do say theyre gut-feel traders but perhaps theyre not analyzing

what theyre actually thinking and theyre seeing a lot of customer flow and a lot of

buyers and they probably dont necessarily realize the reasons why they want to buy

But there are very good traders that say theyre trading off gut feel that I believe

actually have probably reasonable information reasonable thoughts behind it but

they wouldnt literally toss a coinrdquo 55 high experience high pay

Feelings are also seen as a kind of radar directing attention and shaping perceptions

around opportunities to enable them to be promptly seized

ldquoI think what a trader has to have is not necessarily this gut feeling but this nose for

opportunities If an opportunity comes along you have to be able to spot it and see it

22

and sometimes people you typically find in this business - an opportunity is there and

they cant see it and then its taken by someone else and its like oh yeah that was a

good idea but it is gonerdquo 58 high experience low pay

Not only do feelings act as a kind of radar directing attention but they do so in a way that

enables rapid decision making under time pressure As one trader noted -

ldquoTrading includes stuff which is beyond trading Trading is when you make decisions

involving financial risk that have two qualities you have to make them in someone

else‟s time schedule not your own and when you make a decision you have to be

confident when you have incomplete or imperfect information and therefore there

must be some kind of intuitive or qualitative elementrdquo 121 high experience high pay

Experienced traders made much more reference to intuition or gut feellsquo as they often

phrased it than less experienced traders However again there were important differences

between low and high paid traders in the high experience group Low paid traders who talked

about the use of intuition often talked of it in terms of a rather mysterious process You either had

a feeling or not For example

ldquoIt‟s almost like a sixth sense Something comes over you and you feel like - yes I

know they‟re going to be looking to buy these later on or looking to sell these later

onrdquo 116 high experience low pay

By contrast the top paid group tended to reflect critically about the origins of their

intuitions and to bring them together with more objective information -

ldquoIf I do fancy a stock - you have a feeling it feels right it has done nothing for like

two or three months and you‟ve seen sellers and they start to dwindle and it is just

stagnant and then you have a look on the charts you refer to the technical side as

well as the emotional side of the trade So you know a combination of technical and

23

emotional as well as what the analyst thinks as well so you sort of bring the

instruments you have available to you to make the decision rather than the snap

[snaps his finger] I fancy buying thatrdquo 101 high experience high pay

ldquoI may examine opportunities based on intuition that something is going to happen

but the decision is based on something I think is rationalrdquo 68 medium experience

high pay

Reported use of intuition does seem to increase with trader experience However traderslsquo

engagement with their feelings is qualitatively different between low and high performers High

performing traders seem to engage with their intuitions at a meta-cognitive level and make

judgments about the relevance of these feelings to the decision at hand This is consistent with

the growing literature on expertise which points to experience as a necessary but insufficient

condition for the development of expertise and points to the role of extended critical engagement

with practice in developing expertise (Ericsson 2006 Ericsson Krampe amp Tesch-Roemer

1993)

Traders were not universally positive about the role of intuition in market decision making

Some believed reliance on such feelings yields poor outcomes -

ldquoMany traders feel that models have been developed by academics who do not know

markets and [traders] think that gut feeling is more important My experience is that

this is 100 wrong and computers can make better decisions than tradersrdquo 37

medium experience medium pay

Overall however the data support a picture of expert traders having a meta-cognitive

engagement with emotion regulation This process entails discrimination between emotions in

terms of their relevance to the decision at hand and effective strategies for emotion regulation to

enhance performance

24

Empathy

The third identified theme was empathy monitoring own emotions as information

about what other market players might be feeling Only five traders explicitly described

using their own capacity for empathy as a decision making tool Although not frequent in

our data these examples are important illustrating that there is a path for traders beyond

simply seeking to eliminate or reduce the intensity of their emotions These traders

fostered feelings as a source of information about other market actors which they managed

and used in a self-aware analysis One trader described using his own fear as an indicator

of fear in the market Another described actively imagining the feelings of other market

actors ―trying to put myself in [the Bank of England Governorlsquos] feet to develop a feel for

how he feels and thinks 14 high experience high pay

Three traders talked about an emotional affinity with the feelings of people in

national markets (Spain 34 high experience medium pay Italy 70 medium experience

low pay and Japan 117 high experience medium pay) with whom they shared a common

culture and propensity to react emotionally in similar ways to the same market events This

group was small but these data broaden the picture of traders reasoning with emotionlsquo

and offer a potentially rich and fruitful avenue for future research

DISCUSSION AND CONCLUSIONS

To ask whether emotion disturbs or aids traderslsquo decision-making is to ask the wrong

question Traderslsquo emotions and cognition are inextricably linked Therefore a more productive

question to ask in this context is whether there are more or less effective strategies for managing

and using emotion in financial decision-making This has been the thrust of our analysis which

25

sought to move beyond previous work that simply characterizes emotional arousal as detrimental

to performance (eg Lo et al 2005 Schunk and Bersh 2006) The study contributes to our

understanding of the role of emotions in work and decision-making in several distinct ways In

contributing to our understanding of the role of emotion at work this study has particular

relevance in that it considers a work domain which has been theorized as strongly normatively

rational as opposed to a work domain (such as negotiation or customer service) where

performance is primarily dependent on effective social interaction However it is clear from this

study that even within such an analysis-intensive domain as financial trading emotion plays a

central role Traders and their managers are frequently preoccupied with the effective regulation

and use of emotions in their work Our work points to the value of a more nuanced understanding

which considers the role of emotions in decision-making the differential impact of various

emotion regulation strategies the conditions under which gut-feellsquo may support effective

decision-making and the role of empathic responses in understanding the behavior of other

market actors

Effective emotion regulation seems to be a critical success factor in trading for our

findings suggest that the strategies for emotion regulation adopted by expert higher performing

traders are qualitatively different from those of lower performing traders In particular higher

performers are more inclined to regulate emotions through attentional deployment and cognitive

change and may display a willingness to cope with negative feelings in the interests of

maintaining objectivity and pursuing longer term goals The kind of attention and appraisal-

focused emotion regulation strategies used by high-performing traders do not seem to be too

cognitively expensive and are effective in reducing negative experience of emotion (Gross

2002) By contrast less expert traders engage either in avoidant behaviors such as walking

away from the desk or invest significant cognitive effort in modulating their emotional

26

responses This extends previous findings (eg Grandey 2003) concerning the performance

benefits of antecedent versus response-focused emotion regulation in the context of emotion

labor to the very different context of financial decision-making Our findings also suggest that

willingness to endure negative feelings in pursuit of long-term goals may be more adaptive than

purely defensive strategies aimed at maintaining positive feelings (Labouvie-Vief 2003 Tamir

2005)

This study also provides evidence that more effective emotion regulation strategies can be

learned in a financial decision-making context While an individuallsquos preferred approach to

emotion regulation is likely to be influenced by personality traits neuroticism and extroversion in

particular (Gross amp John 2003) our interviews with traders and their managers also point to the

importance of traderslsquo learned strategies for emotion regulation Importantly our study also

suggests that defensive emotion regulation strategies may be problematic because they reduce

opportunities to exercise expert intuition

These findings go well beyond prior research on emotion regulation and performance

(eg Grandey 2003) which has a primary focus on performance in the context of interpersonal

interaction Our findings uniquely address the performance of professional traders for whom

performance is not primarily dependent on interpersonal interaction and which has been

theorized as strongly rational involving the selection of optimal strategies in the face of complex

cognitive demands and requiring attention to a large volume of information with uncertain

relevance

Turning to intuition traders in our study mirror the balance of opinion in the research

literature on intuition They are equivocal about whether feelings and hunches about appropriate

courses of action lead to better or worse outcomes than purely rational analysis There were

strong feelings on both sides with traders being quite evenly divided between the two camps

27

However again our study suggests the importance of a more nuanced approach than simply

asking whether reliance on intuition is good or bad and points towards the conditions in which

reliance on intuitive judgment may be more and less effective The findings suggest that one

characteristic of higher performing traders may be a greater willingness to reflect critically about

their intuitions and feelings about trading These traders often reported relying on intuition but

they tend to weigh their feelings critically alongside other evidence and to reflect about the

provenance of those feelings Lower performing traders may rely on feelings alone and show

less propensity to think critically about the source of hunches This reflection by expert traders

about the provenance of feelings may be particularly salient given Schwarz and Clorelsquos (1983

2003) finding that the impact of emotions on behavior is reduced or disappears when the

relevance of those emotions is explicitly called into question

That traderslsquo reliance on affective cues in decision-making can support effective

performance is consistent with Damasiolsquos observation that deciding advantageously depends on

the use of affective cues in both learning and deciding (Bechara et al 1997 Damasio 1994)

There is increasing evidence that humans are naturally proficient in the ability to acquire

expertise and that encapsulation of experience in expert intuition and perception via system one

provides a means of by-passing cognitive limits (Ericsson 2006) The nature of expertise could

counteract the inherent environmental uncertainties that Tiedens and Linton (2001) identified as

leading to more conscious appraisal of information While not an unequivocal result our finding

of greater critical engagement among higher performing traders with intuitions and their more

sophisticated deployment of intuition in combination with analysis suggests an important

direction for future research

The small number of accounts of traders monitoring their own emotions as a source of

information about the emotions of other market actors was intriguing These data suggest a

28

possibly productive avenue for future research We do not have evidence of performance

outcomes of predictive uses of empathy in this manner but our findings are consistent with

arguments that the evolution of the human brain has been significantly driven by the need to

predict the behavior of other humans often via subtle cues (eg Nicholson 2000)

We suggest that the identification of links between decision-making performance and

emotion regulation in this study has important implications for theory development in two key

fields First while somewhat tacit in much of the literature the implication of many claims in the

decision-making and behavioral finance literatures is that a range of key decision-making biases

are underpinned by mechanisms which involve emotion processes One relevant explicit example

is Thalerlsquos (1985 1999) account of the role of hedonic editinglsquo in mental accounting and the

disposition effect (the tendency to hold losing assets longer than winning assets) This explains

key biases in terms of the desire to maintain positive hedonic tone There is evidence too of

interpersonal variation in propensity to exhibit such biases for example investors vary in their

propensity to exhibit the disposition effect (Shapira amp Venezia 2001 Weber amp Welfens 2008)

In this study we have seen that traders seek to regulate emotions in order to avoid decision biases

and that higher performing traders typically exhibit more sophisticated emotion regulation

strategies This suggests that it would be productive to investigate the role of emotion regulation

as one key source of interpersonal variation in susceptibility to a range of decision biases

A second implication concerns the role of emotion in expert performance While much

attention has been paid to the nature of cognition in expert performance the expertise literature

hardly considers the role of emotion For example examining the index of the Cambridge

Handbook of Expertise and Expert Performance (Ericsson et al 2006) reveals very few

references to emotion and these are peripheral to the main arguments of the chapters which

contain them Our research suggests first that effective emotion regulation may be an important

29

facet of expert performance and second that greater attention should be paid to the interactions

between emotion emotion regulation and expert intuition Further research could test the

proposition that effective expert intuition is reduced by reliance on defensive emotion regulation

strategies

While our study points to the importance of intuition in traderslsquo work it may be that the

relative importance of intuition and analysis vary with task characteristics such as time span of

decision-making Certainly this seemed to be the view of several senior managers with

responsibility for allocating traders to trading roles The interplay that expert traders described

between intuition and analysis is also intriguing The importance of context to the role of affect

in decision-making has been noted in prior research (Forgas amp George 2001) Further research

could usefully explore this aspect of traderslsquo expertise

This study also contains some potentially important implications for practice First it

points to the importance of learned strategies for emotion regulation and the need for effective

support for their development Second our data directly and indirectly point to the key role of

management in this process Our findings suggest that there may be considerable benefits to

skilled managerial interventions that help to steer effective emotion regulation and support

inexperienced traders in developing emotion regulation skills Additionally managers may be

able to help traders to understand the productive role that critically engaged experience-based

intuition may play in decision-making Our evidence suggests that many high performing traders

deploy a reflective and critical approach to the use and development of intuition well-founded in

experience Managers could help to guide this process through coaching The contextual

dependence of high quality intuitions suggests they are quite domain specific and may not

transfer across contexts As several informants told us this is especially true for traders operating

under different market conditions

30

We heard repeated concerns from senior managers who worried about traders who had

not seen a bear market and would not operate well when that occurred We also heard many

stories of people transferring between trading areas and needing time to re-contextualize

expertise before their intuitions could be considered reliable Thus managers have a role in

helping traders to extend the boundaries of their expertise Given recent events in financial

markets our findings may be relevant to an understanding of how traders react under massively

changed trading conditions and how those reactions might either contribute to or result from

market volatility

This research has some important limitations First although we have argued for the

importance of an account of emotion that includes the experience of emotion as Pham (2004

368) notes the affective system is focused on the present Thus people can be poor at recalling or

predicting emotions There are limits to the human capacity to introspect on emotion processes

and to recall the experience of emotion These limits are also subject to wide individual

differences The capacity for introspection and recall will also vary between individuals For this

reason studies such as ours need to be complemented with more physiologically based research

as well as further qualitative and quantitative studies

Second as in all work contexts traders subscribe to norms of socially sanctioned

behavior and to common narratives about the nature of their work We have not treated emotional

labor as a primary component of traderslsquo work and performance The majority of work

interactions are carried out through highly abbreviated electronic exchanges which provide a poor

medium for the communication of emotion However there is a sense in which traders engage in

emotional labor since especially for novices there are social pressures to comply with display

rules which emphasize the avoidance of displays of strong emotion One common narrative

thread that ran though many traderslsquo accounts of their work was a representation of trading work

31

as principally concerned with rational analysis from which emotions are a dangerous distraction

This narrative seemed particularly strong in the accounts of less experienced traders Although as

we have seen the mask would often slip as they discussed their work Some traderslsquo accounts

were clearly colored by a desire to conform to this mode of self-presentation In consequence it is

possible that in our interviews and during data analysis we were at times unable to distinguish

effectively between defensive denial of emotion and effective regulation of emotion This would

be another avenue for future research

To conclude we know that emotions are a rich source of experience in everyday life but

at the same time in work contexts they can be a source of vulnerability a wayward influence over

judgment and a source of disturbance to process The more ―rational-economic such

environments are the more likely we are to hold such beliefs (Nicholson 2000) Our research

illustrates that this position is false or at best short-sighted In the hyper-rational world of

trading in financial markets we did find some evidence that emotions disturbed performance but

mostly among the inexperienced and un-reflective traders The best traders are able to regulate

emotions effectively and incorporate relevant emotions as information ndash signals or a kind of

radar that contain information about risks what is going on in the minds of others and the weight

and relevance to be accorded to onelsquos own past experience

32

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Baumeister R F Bratslavsky E Muraven M amp Tice D M (1998) Ego depletion Is the

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1265

Bechara A Damasio A Tranel D amp Damasio A R (1997) Deciding advantageously before

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Bower G H (1981) Mood and memory American Psychologist 36 129 ndash 148

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Braun V amp Clarke V (2006) Using thematic analysis in psychology Qualitative Research in

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Buck R (1999) The biological affects a typology Psychological Reveiw 106 301-336

Damasio A R (1994) Descartes‟ error Emotion reason and the human brain New York

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Dane E amp Pratt M G (2007) Exploring intuition and its role in managerial decision making

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De Bondt W Palm F amp Wolff C (2004) Introduction to the special issue on behavioral

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Dreyfus H amp Dreyfus S (2005) Expertise in real world contexts Organization Studies 26

779-792

Epstein S Pacini R Denes-Raj V amp Heier H (1996) Individual differences in intuitive-

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Ericsson K A Krampe R T amp Tesch-Roemer C (1993) The role of deliberate practice in the

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Ericsson K A (2006) An introduction to the Cambridge Handbook of Expertise and Expert

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Fama E F (1991) Efficient Capital Markets II The Journal of Finance 46 1575-1617

Fama E F (1998) Market efficiency long-term returns and behavioral finance Journal of

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Fenton-OCreevy M Nicholson N Soane E amp Willman P (2005) Traders Risks Decisions

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Finucane M L Alhakami A Slovic P amp Johnson S M (2000) The affect heuristic in

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Forgas JP amp George JM (2001) Affective influences on judgments and behavior in

organizations An information processing perspective Organizational Behavior and

Human Decision Processes 86(1) 3-34

Grandey AA (2000) Emotion Regulation in the Workplace A new way to conceptualize

Emotional Labor Journal of Occupational Health Psychology 5(1) 95-110

33

Grandey A A (2003) When the show must go on surface acting and deep acting as

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Gray JA (1999) Cognition emotion conscious experience and the brain In T Dalgleish and

MJ Power (Eds) Handbook of Cognition and Emotion (pp83-102) Chichester England

Wiley

Gross J (2002) Emotion regulation affective cognitive and social consequences

Psychophysiology 39 281

Gross J J amp John O P (2003) Individual differences in two emotion regulation processes

Implications for affect relationships and well-being Journal of Personality and Social

Psychology 85(2) 348-362

Gross J J amp Thompson R A (2007) Emotion regulation Conceptual foundations In J J

Gross (Ed) Handbook of emotion regulation New York NY Guilford Press

Isen A M Shalker T E Clark M amp Karp L (1978) Affect accessibility of material in

memory and behavior A cognitive loop Journal of Personality and Social Psychology

36 1-12

Johnson E amp Tversky A (1983) Affect generalization and the perception of risk Journal of

Personality and Social Psychology 45(1) 20-31

Kavanaugh D amp Bower G (1985) Mood and self-efficacy Impact of job and sadness on

perceived capabilities Cognitive Therapy and Research 9 507-525

Klein G A Calderwood R amp Clinton Cirocco A (1986) Rapid decision-making on the

fireground Human Factors and Ergonomics Society 30th Annual Meeting Vol 1 576-

580

Knorr-Cetina K amp Brugger U (2002) Traders Engagement with Markets A Postsocial

Relationship Theory Culture and Society 19(5-6) 161-185

Labouvie-Vief G (2003) Dynamic integration Affect cognition and the self in adulthood

Current Directions in Psychological Science 12 201-206

Lerner J S amp Keltner D (2001) Fear anger and risk Journal of Personality and Social

Psychology 81(1) 146-159

Lerner J S Small D A amp Loewenstein G (2004) Heart strings and purse strings Carryover

effects of emotions on economic decisions Psychological Science 15(5) 337-341

Lo A Repin D amp Steenbarger B (2005) Fear and greed in financial markets A clinical study

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Lo A W amp Repin D V (2002) The Psychophysiology of Real-Time Financial Risk

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MacKenzie D (2006) An Engine Not A Camera How Financial Models Shape Markets

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Mayer JD amp Hanson A (1995) Mood-congruent judgment over time Personality and Social

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Mayer JD DiPaolo M and Salovey P (1990) Perceiving affective content in ambiguous

visual stimuli a component of emotional intelligence Journal of Personality Assessment

54 772-781

Miller G (2003) The cognitive revolution a historical perspective Trends in Cognitive Science

7 141

Muraven M amp Baumeister R F (2000) Self-regulation and depletion of limited resources

Does self-control resemble a muscle Psychological Bulletin 126 247-259

Nicholson N (2000) Managing the Human Animal London ThomsonTexere

34

Peterson R L (2007) Affect and financial decision-making How neuroscience can inform

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Pham M T (2004) The logic of feeling Journal of Consumer Psychology 14 360-369

Phelps E A (2006) Emotion and cognition Insights from studies of the human amygdala

Annual Review of Psychology 57 27-53

Sayer A (1997) Essentialism social constructionism and beyond The Sociological Review 45

453-487

Shapira Z amp Venezia I (2001) Patterns of behavior of professionally managed and

independent investors Journal of Banking and Finance 25 1573ndash1587

Schunk D amp Betsch C (2006) Explaining the heterogeneity in utility functions by individual

differences in decision modes Journal of Economic Psychology 27 386-401

Schwager J D (1993) Market Wizards Interviews with Top Traders New York Collins

Schwarz N amp Clore G L (1983) Mood misattribution and judgments of well-being

Informative and directive functions of affective states Journal of Personality and Social

Psychology 45 513-523

Seo M G Barrett L F amp Bartunek J M (2004) The role of affective experience in work

motivation Academy of Management Review 29 423-439

Seo M G amp Barrett L F (2007) Being emotional during decision makingmdashgood or bad An

empirical investigation The Academy of Management Journal 50 923-940

Shefrin H (2000) Beyond Greed and Fear Understanding Behavioral Finance and the

Psychology of Investing Boston MA Harvard Business School Press

Stokes A F Kemper K amp Kite K (1997) Aeronautical decision making cue recognition and

expertise under time pressure In C E Zsambok amp G Klein (Eds) Naturalistic Decision

Making pp 183-196 Mahwah NJ Erlbaum

Tamir M (2005) Dont worry be happy Neuroticism trait-consistent affect regulation

and performance Journal of Personality and Social Psychology 89 (3) 449 ndash

461

Thaler R H (1985) Mental accounting and consumer choice Marketing Science 4(3) 199-214

Thaler R H (1993) Advances In Behavioral Finance New York Russel Sage Foundation

Thaler R H (1999) Mental accounting matters Journal of Behavioral Decision Making 12(3)

183-206

Tiedens L amp Linton S (2001) Judgment under emotional certainty and uncertainty the effects

of specific emotions on information processing Journal of Personality and Social

Psychology 81(6) 973-988

Todd P M amp Gigerenzer G (2007) Environments that make us smart Ecological rationality

Current Directions in Psychological Science 16 167-171

Totterdell P Briner R B Parkinson B amp Reynolds S (1996) Fingerprinting time series

dynamic patterns in self-report and performance measures uncovered by a graphical non-

linear method British Journal of Psychology 87(1) 43-60

Weber M amp Welfens F (2008) Splitting the Disposition Effect Asymmetric Reactions

Towards bdquoSelling winners‟ and bdquoHolding Losers‟ Working Paper University of

Mannheim

Wright WF amp Bower GH (1992) Mood effects on subjective probability assessment

Organizational Behavior and Human Decision Processes 52 276ndash91

5

emotion regulation approach to engaging with intuition and trader performance Finally we

consider the theoretical and practical implications of our findings

THEORETICAL ORIENTATION

The Relationship between Emotion and Cognition

Cognition as a field of study within psychology emerged in the middle of the 20th

century

as a reaction to the dominance of behaviorism (Miller 2003) A guiding metaphor for much

cognitive psychology has been the brain-as-computer an analogy which leaves little place for

emotion except as a disturbance of optimal cognitive functioning or as a signaling system that

accompanies action and experience Thinking has been understood as quite apart from feeling In

a major review of research into the relationships between emotions and cognition Phelps (2006)

concludes that understanding the role and significance of emotion is critical to understanding

cognition It has become clear that cognition is not only affected by emotion but that emotion is

central to our cognitive functioning Current models have converged on dual processing theories

of cognition (Bechara et al 1997 Buck 1999) which suggest that decision-making is

underpinned by two parallel processes System one is rapid pattern recognition activates

emotionally weighted biases which in turn activate stored behavioral repertoires This process is

non-conscious with important parallels to perceptual processes and linked to intuitive decision

making (Dane amp Pratt 2007 Epstein et al 1996) System two the slower process involves

conscious deliberation and analysis (the executive function) facts are represented and weighed

options are generated and compared potential outcomes are modeled and learned reasoning

strategies are applied

Models of the dual process approach consider these two decision processes not as

completely separate but as interacting Conscious analysis of a situation can affect emotional

6

appraisal and immediate affective response may be one input among others into deliberation

Most of our behaviors (and associated decisions) happen in an automatic fashion with minimal

active participation by the conscious self unless we are confronted with a novel situation (Bargh

et al 1996) or uncertainty (Tiedens amp Linton 2001) The brainlsquos capacity for conscious

deliberation is limited and can be depleted much as a muscle can become exhausted (Baumeister

et al 1998 Muraven amp Baumeister 2000) Thus particularly in fast-paced and demanding

environments conscious deliberation is reserved for tasks that are accorded the highest priority

Emotions have an important role as cues to decision making Finucane et al (2000) suggest that

emotions act as a heuristic That is emotions provide an accessible summary of experience

cognitions and memories One might expect that traders given the volume of decision demands

will engage in a great deal of automatic decision making and use emotional cues There is some

empirical evidence supporting this view Lo and Repin (2002) carried out a small-scale study of

the physiological responses (blood pressure and skin conductance) of professional traders (N=10)

to actual market events They found emotional arousal to be a significant factor in the real-time

financial decision-making of both novice and experienced traders Less experienced traders

showed stronger arousal in response to short-term market fluctuations than more experienced

traders indicating that emotions are particularly important in relatively novel situations that

require cognitive effort

Emotion and Decision-Making Performance

There is evidence that emotions affect decision-making performance First there is a

range of evidence that emotions can induce biases in decision-making Emotions can skew

information retrieval For example there is evidence that it is most easy to recall experiences that

are congruent with current emotional state (Bower 1981 1991 Mayer et al 1990) Emotions

also directly bias decision-making for example fear and anger have significant (and opposite)

7

effects on risk perceptions (Lerner amp Keltner 2001 Lerner et al 2004) Additionally emotions

bias the value attached to outcomes For example intense negative emotions enhance valuation of

short-term outcomes regardless of negative long term consequences (Gray 1999) Overall

positive affect tends to be associated with optimistic decision making and negative affect with

pessimistic choices (Isen et al 1978 Johnson amp Tversky 1983 Kavanagh amp Bower 1985

Mayer amp Hanson 1995 Schwarz amp Clore 1983 Wright amp Bower 1992)

Emotions also have a role in risk-related decision making A laboratory study of financial

decision-making under risk found that low levels of emotional experience led to higher levels of

performance through greater risk neutrality due to a more constant association between objective

gain and subjective value (Schunk amp Betsch 2006) Lo et al (2005) found clear associations

between day-traderslsquo emotions their decision making and performance There was evidence that

positive decision-making outcomes as assessed by profits and losses were associated positively

with pleasant affect (eg content) and negative outcomes with unpleasant affect (eg bored)

Furthermore investors who experienced more intense positive and negative emotional reactions

to gain and loss were poorer performers than those with more attenuated emotional responses

The authors suggested that rapid emotional decision making is unsuited to the complex

information-rich environment of trading The trading practitioner literature also tends to promote

the view that emotions are detrimental to decision making exemplified in the following quotation

from highly rated trader Bruce Kovner ―Whenever a trader says bdquoI wish‟ or bdquoI hope‟ he is

engaging in a destructive way of thinking because it takes away from the diagnostic thought

process (Schwager 1993 82) In contrast Seo and Barrett (2007) carried out a study of

investment club members using an internet-based investment simulation accompanied by

emotional-state surveys They found that individuals who experienced more intense emotions

achieved higher decision-making performance

8

Thus while there is ample evidence that emotions affect decision-making performance

including for traders the evidence on the nature of that impact is mixed While there is evidence

for the biasing effect of emotions there is also evidence that we rely on emotional cues in rapid

automatic decision-making and they confer a tangible advantage to everyday decision-making

(Bechara et al 1997)

Research into the nature of expertise has tended to characterize intuition (a form of

experientially-based pattern recognition linked to the affectively cued system 1 (Dane and Pratt

2007)) as integral to expert performance ndasheg Dreyfus amp Dreyfus 2005 Klein et al 1986

Stokes et al 1997) Dane and Pratt (2007) note an important distinction between on the one

hand the decision heuristics literature which mainly supports a view of intuitive decision-

making as inferior to more rational models and on the other the literature on expertise which

emphasizes the central role of intuition in expert performance A crucial difference between these

literatures is the different emphasis placed on research method and context Research on decision

heuristics is often context free and relies heavily on experiments using subjects who are

inexperienced in the tasks studied There is also evidence that some of the key cognitive biases

identified as maladaptive products of heuristic reasoning in experimental settings either do not

occur or lead to better outcomes when decision-making is studied in the field or studied using

approaches that approximate real life contexts (Todd amp Gigerenzer 2007) The expertise

literature in contrast places great emphasis on domain specific knowledge and skills on the

development of complex cognitive schema that enable rapid associative pattern recognition and

on the activation of extensive and complex behavioral repertoires Dane and Pratt (2007) argue

that in consequence intuition will be more likely to function as an effective component of

decision-making in performance domains that require significant experience and complex domain

relevant schema a description which fits the world of financial trading

9

In summary the emotions literature gives considerable support to the idea that emotions

have multiple critical impacts on decision-making Some of these can be characterized as bias

with the potential to be detrimental to decision-making performance However it is also apparent

that there is an alternative position it is not emotions per se that are detrimental to decision-

making performance but rather that expertise and the regulation of emotions determine whether

emotions have positive or negative impacts on decision performance

Emotion Regulation

Accounts of emotions as bias focus primarily on the potential for emotions to have a

negative influence on performance By contrast accounts of emotions as information focus

primarily on the valuable role of emotions in encapsulating prior relevant experience In

principle these two perspectives may not incompatible and effective emotion regulation may

have a role in reducing the biasing effect of emotion while retaining sensitivity to the information

which emotions may carry It thus seems likely that the regulation of emotion may play an

important role in emotion performance effects Gross (2002 Gross amp Thompson 2007)

distinguishes a series of different stages in emotion episodes and five associated emotion

regulation strategies The model suggests that people both choose and modify situations

Situations require attention and appraisal which leads to an emotional response

Attempts to manage emotions may focus on any of the stages indicated in the above

model One approach to managing emotions is to select avoid or modify situations Other

approaches include focusing attention on emotionally salient elements of a situation and where

emotional responses might be difficult to cope with reframing situations to modify the emotional

response It is also possible to avoid emotional responses by refocusing attention elsewhere Each

of these strategies could lead to responses being modulated or suppressed Gross and Thompson

(2007 16) make clear that this model of emotions and their regulation is something of a

10

simplification However the model usefully illustrates the central role of emotion regulation in

decision-making

In addition to theoretical modeling there is empirical evidence for a relationship between

strategies for emotion regulation and a range of important outcomes Recent research has paid

particular attention to the difference in outcomes between antecedent-focused emotion regulation

strategies which seek to change emotions before emotion responses have become fully activated

and response-focused regulation strategies which modify behavior and emotion expression once

the emotion response is underway Emotion regulation strategies have been shown to have

differential effects on outcomes including cognitive performance health and qualities of social

interaction (Gross and Thompson 2007) In the domain of work performance much attention has

focused on the emotional labor required by customer service interactions Here emotion

regulation has been characterized as a process of deep and surface acting Surface acting is the

faking of emotion display to accord with organization display rules Deep acting involves

modifying inner feelings Grandey (2000) considers emotional labor as a subset of emotion

regulation and equates antecedent-focused and response-focused regulation with deep and surface

acting respectively In a study of front-line service workers Grandey (2003) found antecedent-

focused emotion regulation was associated with greater effectiveness in relating to customers in a

warm friendly manner while response-focused emotion regulation was associated with emotional

exhaustion and greater tendency to break character and reveal negative emotions in a service

encounter This result supports Grosslsquos earlier work (2002) There is also some evidence on

emotion regulation and financial decision-making Seo and Barret (2007) found that investors

who were better able to identify and discriminate among their current feelings achieved superior

decision-making performance They argued that this relationship was mediated by effective

regulation of the influence of feelings on their decision-making

11

In the present study we go beyond the study of emotion regulation in a context of work

performance that depends primarily on social interaction In contrast to emotional labor studies

which focus on the context of interpersonal interaction most trading nowadays (and in all cases

we studied) is conducted electronically via computer or through highly abbreviated and

formalized electronic messages with counterparties Rather than depending on appropriate

emotion display in the context of customer interaction or negotiating with counterparties trader

performance depends on selecting optimal trading strategies in the face of complex cognitive

demands and the need to process significant amounts of information with uncertain relevance

(Knorr-Cetina amp Bruegger 2002) We now turn to the present study

THE STUDY AND METHODS

The data reported in this paper were collected as part of a large multifaceted study of the

role and behavior of traders working in investment banks For this paper we have returned to this

data corpus to examine the considerable amount that traders told us about their work and

emotion an aspect touched on only superficially in previous analysis of this data (see Fenton-

OCreevy Nicholson Soane and Willman 2005 for an extended account of the study)

Participants

Participants were sampled from four leading investment banks with offices in the City of

London Three banks were American and one was European Managers in each organization were

asked to select a representative sample of traders from a range of markets trading in stocks

bonds and derivatives The mean age of participants was 3281 years (sd = 491) There was

variation in traderslsquo experience with overall tenure (including time with previous employers) in a

range from 6 months to 30 years and a mean job tenure of 780 years (sd = 558) The trader

sample comprised 116 men (983) and 2 women (17) The participants were traders in

equities bonds and derivatives most engaged in either market making or proprietary trading or

12

both We gathered information on individual trader characteristics and performance and carried

out semi-structured interviews with each trader and with a further 10 senior managers Where

traders were also managers we interviewed them twice once as a trader and once as a manager

Data

Qualitative data Interviews lasted between 30 and 90 minutes They were recorded and

transcribed in full The interviews ranged over multiple aspects of the traderslsquo roles and work

The data set for this study consisted of the portions of the interviews relevant to the role of

feelings in traderslsquo work and decision making Traders were asked to describe the range of

emotions they experienced during trading Follow-up questions encouraged them to explore the

long-term and short-term effects of emotions on their decision making and trading strategy the

role of intuition in their trading and the impact of emotions on performance Managers were

asked to describe how they evaluated and managed trader performance Again this often

produced talk about traderslsquo feelings and how they were managed

Performance data Hard performance data for traders are difficult to obtain Measures

such as value at risk trading outcomes and profit and loss are highly confidential in this setting

and were not available to us so we used total remuneration as our measure of trader performance

We felt this to be a reasonable proxy for decision-performance since a high proportion of total

remuneration is a variable annual performance linked bonus and the non-bonus elements tend to

reflect longer term financial performance in this very performance oriented sector We have

treated this variable as an indicator of expertise which Ericsson (2006) defines as reliably

superior performancelsquo Traders were asked to state their income including bonus in terms of

four categories (1 pound50000 - pound99999 (N = 4) 2 pound100000 to pound299999 (N = 41) 3 pound300000-

pound499999 (N = 34) 4 more than pound500000(N = 38) One trader declined to provide this

information

13

Analysis

The raw data were the full transcripts of all interviews We used a thematic analysis

approach which we judged to be particularly well suited to the present study As Braun and

Clarke (2006 78) note thematic analysis does not rest on a single epistemic position but can

span both realist and constructivist approaches We take the position that emotions have both a

measurable biological reality and exist in the realm of socially constructed personal experience in

which emotions have personal and social meaning

Data were open-coded by each author separately then in discussion using the NVIVO

program Common statements were identified and used as the basis for a first set of coding

categories which were subsequently refined and consolidated Coding categories were thus both

emergent from the interviews and drew on constructs identified in the literature (eg approaches

to emotion regulation) relevant to emerging themes Thus coding was both theoretical and

inductive As we analyzed the data and drew tentative conclusions we explicitly sought

disconfirming evidence to test the robustness of our insights In a later stage of analysis we

partitioned the sample into groups of low (lt5 years n=25) medium (5 to 10 years n=48) and

high experience (gt10 years N=45) and into groups of low (remunerationlt pound300k N=45) medium

(pound300k- pound500k N=34) and high expertise (gt pound500k N=38) We compare interview responses of

three specific groups inexperienced low paid traders (N=18) highly experienced but low paid

traders (N=15) and high paid traders (N=38) The remainder of the sample were medium

experience and pay There were no low experience high pay traders We chose the three

comparison groups to provide maximal contrast in differentiating the characteristics associated

with different levels of experience and expertise respectively

14

In Table 1 we summarize our key findings and the nature of the evidence for each finding

In the final column we note our sense of the strength of the evidence for each finding This

represents a qualitative conclusion arrived at though discussion between the authors and drawing

on quantity consistency importance and clarity of supporting data and existence of any

disconfirming evidence In the next section of the paper we discuss these findings and the

evidence for them in more detail Direct quotes are verbatim accompanied by the case number of

the respondent and their classification in terms of experience and pay level

TABLE 1 ABOUT HERE

TRADERSrsquo UNDERSTANDINGS OF EMOTION IN THEIR TRADING PRACTICE

Emotional experience and regulation

For many traders especially the less experienced trading is marked by significant and

persistent emotional responses to successes and setbacks It is relevant to note the distinction

between mood and emotion since both were relevant to traders Mood can be understood as a

relatively diffuse emotional climate which persists over time and not anchored to specific

situations or cognitions In contrast emotions typically have specific objects and give rise to

behavioral response tendencies relevant to those objects (Totterdell Briner et al 1996)

ldquoWhen you lose money you could sit down and cry Anybody who says you couldn‟t

isn‟t being honest with you Of course when it‟s good it‟s fantastic The highs and

lows of a trader‟s life are euphoria or absolute dismayrdquo 106 high experience

medium pay

While these emotional responses would often be triggered by specific events or series of

events in many cases the impact on mood would persist for significant periods with

consequences for subsequent trading behavior For example one manager described a trader

15

working for him as ―having been in the wilderness his confidence totally shattered for about

two years before slowly recovering from a string of losses Many talked about needing weeks or

even months to recover from the impact of major losses especially early in their careers Others

talked about the dangers of false confidence or euphoria which could persist for some time after a

big win

ldquoPeople get a bit arrogant when they have good times but this can be dangerous

because then they stop thinking as muchrdquo 18 medium experience medium pay

ldquoI tend to feel more cautious when losing moneyhellipIf I am having a down month I‟ll

look at trades which I would do if I was having a good month and say I don‟t like it

enough to take the risk on it I become more selective more risk averse and to do a

trade I need to see more than one reason why a trade will work and then might put it

on but not in a huge size When making money I can be more slack 29 high

experience high pay

However our data also suggest emotion regulation is critical to moderating the impact of

emotions on traderslsquo decision making Senior traders and trader managers frequently talked about

the way in which they had developed a capacity to regulate their own emotions and trade more

evenly regardless of success and setbacks

ldquoYou learn to be able to deal with emotions It doesn‟t get to me as much There

were situations when I was extremely stressed up and then you feel physically ill and

you really feel on the verge of throwing up But that was a long time ago and doesn‟t

happen so much now You have seen the ups and downs more You have experienced

them and in a way you are probably more prepared for it and you are aware that

every now and then it will happenhellip but it doesn‟t get to you all that much because

you are aware that it will happen 6 medium experience high pay

16

We examined emotion regulation and its relevance to performance further by considering

data from the three comparison groups (based on experience and pay) We noticed some

important differences in the way in which these groups discussed the interaction between

emotion trading and the use of intuition First there seemed to be notable differences in the

strategies employed for emotion regulation which we describe below in the language of the

Gross and Thompson model (2007) When asked directly about emotion traders in the low

experience group typically started by presenting themselves as fairly immune to the impact of

emotion on their trading However as the interview progressed they would often reveal rather

more vulnerability to emotions than they had claimed initially Take for example this trader who

had been trading for a little less than 4 years -

ldquoI‟m bit of a cold fish I don‟t think emotions greatly affect my decision-making If

you are making money you are achieving your objectivehellip

[But later]

hellipWhen you lose money it can be horrendous violent mood swings You don‟t know

what to do when you lose moneyrdquo 38 low experience low pay

There tended to be two responses types when these traders did talk about their emotions

Some in the low experience low pay group did not talk at all about actively managing their

emotions Others talked about removing themselves from situations when their emotions became

a problem (situation modification) or avoiding situations entirely which make them feel bad

(situation selection)

ldquoI think there is a strong emotional element to trading I think that anyone who‟s

doing it properly and has got their head screwed on is doing everything they can

consciously to overrule that and if I feel that I‟m trading emotionally I will walk off

17

the desk have a glass of water walk up and down the street and then come back and

make decisions when I‟m hopefully not emotionalrdquo 43 low experience low pay

Traders in the experienced group more commonly talked about strategies for emotion

regulation However the nature of these strategies tended to vary between the low paid and high

paid groups In the high experience low paid group traders seemed to find it hard to articulate

how they managed their emotions and the emotion regulation strategies they identified were

predominately situation avoidance situation modification and response modulation

ldquoIf you get two or three decisions wrong you find you might not take a risk for a

month until you build up your confidence There‟s definitely a lot of confidence

involvedrdquo 104 high experience low pay

ldquoI try and keep my emotions under tight controlrdquo 105 high experience low pay

There is a marked contrast in the discourse of the high performing traders who often

showed a greater willingness to reflect on their emotion-driven behavior (the two exceptions to

this were traders with whom we had only short interviews with little opportunity for extended

reflection rather than any denial of the role of emotion) Emotion regulation for these traders

tended to focus mainly on how they directed their attention (attentional deployment) and how

they framed experiences of loss and gain (cognitive change)

ldquoBig losses and big gains can swap around fairly quickly and once you understand

that then you stop concentrating on the loss and you start concentrating more on how

to make money back hellip One big trade is not going to make anyone and one big loss

doesn‟t destroy yourdquo 15 high experience high pay

ldquoExperience definitely helps having traded through the crash etc Youve seen

different scenarios and newer people its like oh my god its the end of the world

whereas there is life after death and so I think that type of experience helps It doesnt

18

necessarily help the new situation on what to do but it just helps your judgmentrdquo 55

high experience high pay

There was a notable absence of avoidant behavior in this group Several participants told

stories which implied a significant degree of persistence in the face of negative emotion

ldquoI had one very bad year from which I learned quite a lot I learned that the

overshooting can go on for a very long time it can be very painful you can hit risk

limits hellip I did not want to get out of the trades so kept the trades and then next year

they made more money than they lost I don‟t think I panicked but I was getting calls

from the CEO Reason prevailed in the end Emotionally it was not easy to cope

with There were times when the desk was down close to $100m I lost almost that

much in days I was under a lot of pressure from New York because they did not

understand my positions but in the end we managed to keep the positions and made

money the next year The hardest thing was persuading others that I had a good

traderdquo 14 high experience high pay

This willingness among some of the high performing traders to experience negative

emotion in order to achieve longer term goals is consistent with Labouvie-Vieflsquos (2003)

argument that positive self-development requires not just strategies to optimize positive affect

but also the ability to tolerate tension and negativity to achieve long term goals

However there may be another important reason why response modulation strategies are

maladaptive for traders As we have seen above while poorly regulated emotions carry over to

subsequent trading and risk biasing subsequent trading behavior emotion cues generated by

reactions to information relevant to current trading under time constraints play an important role

in guiding attention and rapidly choosing appropriate action Both poor regulation of non-

19

relevant emotions and recourse to the attempted suppression of all feeling run the risk of masking

these important cues

The Role of Managers in Emotion Regulation

Further evidence of the importance of emotions and their regulation to trader performance

came from interviews with trader managers A few managers described their role in primarily

technical terms focusing on risk management and personal supervision of problematic trades

However many of those we interviewed clearly saw regulating the emotions of traders who

worked for them as a key element in managing trader performance

ldquoI have to play the role of director of emotions in the sense that when they are down

you have to boost their morale and when they are too excited they want to do stupid

things I have to cool them downrdquo 119 senior manager

ldquoI care deeply because I have tremendous pride in the people herehellipThe stress is

generated by fear entirely and it‟s fear of what I guess everyone has their

insecurities whether it‟s being fired losing lots of money and appearing stupid in

front of their peer group Whatever it is it‟s definitely fear and if you can take the

fear out of the situation they perform betterrdquo 123 senior trader manager high

experience high pay

Many traders described such episodes of managerial intervention as crucial to their

learning and development For example-

ldquoI lost $1m in the first 10 days of the year This was at a time when if you made $1m

in a year that was huge I was devastated and my boss asked me for lunch at the

weekend - I thought that was the end of my career My boss said bdquoa lot of the guys

think you‟re OK but they are worried you are going to be afraid to trade that you‟re

20

going to be gun shy and lose your confidence We want you to know that we like you

and if you think you‟ve got to buy them buy them and if you‟ve got to sell them sell

them but whatever you do don‟t stop trading‟ So that was a huge relief Since then I

don‟t get too depressed about losing money although there are always good days

and bad daysrdquo 25 low experience medium performance

Other managers clearly gave thought to the relative strengths and weaknesses of more

intuitive versus more analytical traders in their decisions about matching traders to roles -

ldquoA gut trader should trade a liquid market - he might change his feel so he needs to

get out The analytical trader who thinks much more about what he‟s doing will

change their mind less often and trade with a different time frame A gut trader can

be bullish in the morning The analytical trader will look at something for a week

and then put on a position - less important to get in and out He doesn‟t need to be in

a liquid market - in an emerging market you need a more analytical traderrdquo 122

Manager

ldquoDerivatives are very quantitative and people think if you have a PhD you will be

very good because you have an understanding of options theory but this is not

always the case and you tend to overlook things Although you can put the

parameters into the model there are still a lot of things which are uncertain

Sometimes adding a more qualitative feel to it ndashbdquoyes that‟s what the model says but

the risk doesn‟t look right‟ hellip I tend to have a mixture of people on the desk - those

who are more quantitative and those who are more common sense or gut instinct

traders Having the blend is quite useful for bouncing ideasrdquo 124 Manager

These reflections have implications for management strategies in trading environments or

indeed any others where the main role of the operative is complex decision-making under

21

constraints of time and uncertain and incomplete information We consider these points further in

our discussion

Emotional Cues and the Use of Intuition

The second broad theme concerned the role of emotional cues in traderslsquo decision-

making Many of the traders discussed this aspect of emotion as intuition Traderslsquo own accounts

and conceptualizations of intuition fit well with Dane and Prattlsquos (200740) definition of intuition

as ―affectively charged judgments that arise through rapid non-conscious and holistic

associations For example -

ldquo[W]ithout a doubt some of the best bargains are the ones you dont do You know

theyre bad bargains You know It‟s a gut feel Youve looked at the playing field and

you just know this is a bad bargainrdquo 106 high experience moderate pay

Some of the traders see a more subtle and sophisticated role for emotions which represent

an unconscious drawing on experience -

ldquoI think many people do say theyre gut-feel traders but perhaps theyre not analyzing

what theyre actually thinking and theyre seeing a lot of customer flow and a lot of

buyers and they probably dont necessarily realize the reasons why they want to buy

But there are very good traders that say theyre trading off gut feel that I believe

actually have probably reasonable information reasonable thoughts behind it but

they wouldnt literally toss a coinrdquo 55 high experience high pay

Feelings are also seen as a kind of radar directing attention and shaping perceptions

around opportunities to enable them to be promptly seized

ldquoI think what a trader has to have is not necessarily this gut feeling but this nose for

opportunities If an opportunity comes along you have to be able to spot it and see it

22

and sometimes people you typically find in this business - an opportunity is there and

they cant see it and then its taken by someone else and its like oh yeah that was a

good idea but it is gonerdquo 58 high experience low pay

Not only do feelings act as a kind of radar directing attention but they do so in a way that

enables rapid decision making under time pressure As one trader noted -

ldquoTrading includes stuff which is beyond trading Trading is when you make decisions

involving financial risk that have two qualities you have to make them in someone

else‟s time schedule not your own and when you make a decision you have to be

confident when you have incomplete or imperfect information and therefore there

must be some kind of intuitive or qualitative elementrdquo 121 high experience high pay

Experienced traders made much more reference to intuition or gut feellsquo as they often

phrased it than less experienced traders However again there were important differences

between low and high paid traders in the high experience group Low paid traders who talked

about the use of intuition often talked of it in terms of a rather mysterious process You either had

a feeling or not For example

ldquoIt‟s almost like a sixth sense Something comes over you and you feel like - yes I

know they‟re going to be looking to buy these later on or looking to sell these later

onrdquo 116 high experience low pay

By contrast the top paid group tended to reflect critically about the origins of their

intuitions and to bring them together with more objective information -

ldquoIf I do fancy a stock - you have a feeling it feels right it has done nothing for like

two or three months and you‟ve seen sellers and they start to dwindle and it is just

stagnant and then you have a look on the charts you refer to the technical side as

well as the emotional side of the trade So you know a combination of technical and

23

emotional as well as what the analyst thinks as well so you sort of bring the

instruments you have available to you to make the decision rather than the snap

[snaps his finger] I fancy buying thatrdquo 101 high experience high pay

ldquoI may examine opportunities based on intuition that something is going to happen

but the decision is based on something I think is rationalrdquo 68 medium experience

high pay

Reported use of intuition does seem to increase with trader experience However traderslsquo

engagement with their feelings is qualitatively different between low and high performers High

performing traders seem to engage with their intuitions at a meta-cognitive level and make

judgments about the relevance of these feelings to the decision at hand This is consistent with

the growing literature on expertise which points to experience as a necessary but insufficient

condition for the development of expertise and points to the role of extended critical engagement

with practice in developing expertise (Ericsson 2006 Ericsson Krampe amp Tesch-Roemer

1993)

Traders were not universally positive about the role of intuition in market decision making

Some believed reliance on such feelings yields poor outcomes -

ldquoMany traders feel that models have been developed by academics who do not know

markets and [traders] think that gut feeling is more important My experience is that

this is 100 wrong and computers can make better decisions than tradersrdquo 37

medium experience medium pay

Overall however the data support a picture of expert traders having a meta-cognitive

engagement with emotion regulation This process entails discrimination between emotions in

terms of their relevance to the decision at hand and effective strategies for emotion regulation to

enhance performance

24

Empathy

The third identified theme was empathy monitoring own emotions as information

about what other market players might be feeling Only five traders explicitly described

using their own capacity for empathy as a decision making tool Although not frequent in

our data these examples are important illustrating that there is a path for traders beyond

simply seeking to eliminate or reduce the intensity of their emotions These traders

fostered feelings as a source of information about other market actors which they managed

and used in a self-aware analysis One trader described using his own fear as an indicator

of fear in the market Another described actively imagining the feelings of other market

actors ―trying to put myself in [the Bank of England Governorlsquos] feet to develop a feel for

how he feels and thinks 14 high experience high pay

Three traders talked about an emotional affinity with the feelings of people in

national markets (Spain 34 high experience medium pay Italy 70 medium experience

low pay and Japan 117 high experience medium pay) with whom they shared a common

culture and propensity to react emotionally in similar ways to the same market events This

group was small but these data broaden the picture of traders reasoning with emotionlsquo

and offer a potentially rich and fruitful avenue for future research

DISCUSSION AND CONCLUSIONS

To ask whether emotion disturbs or aids traderslsquo decision-making is to ask the wrong

question Traderslsquo emotions and cognition are inextricably linked Therefore a more productive

question to ask in this context is whether there are more or less effective strategies for managing

and using emotion in financial decision-making This has been the thrust of our analysis which

25

sought to move beyond previous work that simply characterizes emotional arousal as detrimental

to performance (eg Lo et al 2005 Schunk and Bersh 2006) The study contributes to our

understanding of the role of emotions in work and decision-making in several distinct ways In

contributing to our understanding of the role of emotion at work this study has particular

relevance in that it considers a work domain which has been theorized as strongly normatively

rational as opposed to a work domain (such as negotiation or customer service) where

performance is primarily dependent on effective social interaction However it is clear from this

study that even within such an analysis-intensive domain as financial trading emotion plays a

central role Traders and their managers are frequently preoccupied with the effective regulation

and use of emotions in their work Our work points to the value of a more nuanced understanding

which considers the role of emotions in decision-making the differential impact of various

emotion regulation strategies the conditions under which gut-feellsquo may support effective

decision-making and the role of empathic responses in understanding the behavior of other

market actors

Effective emotion regulation seems to be a critical success factor in trading for our

findings suggest that the strategies for emotion regulation adopted by expert higher performing

traders are qualitatively different from those of lower performing traders In particular higher

performers are more inclined to regulate emotions through attentional deployment and cognitive

change and may display a willingness to cope with negative feelings in the interests of

maintaining objectivity and pursuing longer term goals The kind of attention and appraisal-

focused emotion regulation strategies used by high-performing traders do not seem to be too

cognitively expensive and are effective in reducing negative experience of emotion (Gross

2002) By contrast less expert traders engage either in avoidant behaviors such as walking

away from the desk or invest significant cognitive effort in modulating their emotional

26

responses This extends previous findings (eg Grandey 2003) concerning the performance

benefits of antecedent versus response-focused emotion regulation in the context of emotion

labor to the very different context of financial decision-making Our findings also suggest that

willingness to endure negative feelings in pursuit of long-term goals may be more adaptive than

purely defensive strategies aimed at maintaining positive feelings (Labouvie-Vief 2003 Tamir

2005)

This study also provides evidence that more effective emotion regulation strategies can be

learned in a financial decision-making context While an individuallsquos preferred approach to

emotion regulation is likely to be influenced by personality traits neuroticism and extroversion in

particular (Gross amp John 2003) our interviews with traders and their managers also point to the

importance of traderslsquo learned strategies for emotion regulation Importantly our study also

suggests that defensive emotion regulation strategies may be problematic because they reduce

opportunities to exercise expert intuition

These findings go well beyond prior research on emotion regulation and performance

(eg Grandey 2003) which has a primary focus on performance in the context of interpersonal

interaction Our findings uniquely address the performance of professional traders for whom

performance is not primarily dependent on interpersonal interaction and which has been

theorized as strongly rational involving the selection of optimal strategies in the face of complex

cognitive demands and requiring attention to a large volume of information with uncertain

relevance

Turning to intuition traders in our study mirror the balance of opinion in the research

literature on intuition They are equivocal about whether feelings and hunches about appropriate

courses of action lead to better or worse outcomes than purely rational analysis There were

strong feelings on both sides with traders being quite evenly divided between the two camps

27

However again our study suggests the importance of a more nuanced approach than simply

asking whether reliance on intuition is good or bad and points towards the conditions in which

reliance on intuitive judgment may be more and less effective The findings suggest that one

characteristic of higher performing traders may be a greater willingness to reflect critically about

their intuitions and feelings about trading These traders often reported relying on intuition but

they tend to weigh their feelings critically alongside other evidence and to reflect about the

provenance of those feelings Lower performing traders may rely on feelings alone and show

less propensity to think critically about the source of hunches This reflection by expert traders

about the provenance of feelings may be particularly salient given Schwarz and Clorelsquos (1983

2003) finding that the impact of emotions on behavior is reduced or disappears when the

relevance of those emotions is explicitly called into question

That traderslsquo reliance on affective cues in decision-making can support effective

performance is consistent with Damasiolsquos observation that deciding advantageously depends on

the use of affective cues in both learning and deciding (Bechara et al 1997 Damasio 1994)

There is increasing evidence that humans are naturally proficient in the ability to acquire

expertise and that encapsulation of experience in expert intuition and perception via system one

provides a means of by-passing cognitive limits (Ericsson 2006) The nature of expertise could

counteract the inherent environmental uncertainties that Tiedens and Linton (2001) identified as

leading to more conscious appraisal of information While not an unequivocal result our finding

of greater critical engagement among higher performing traders with intuitions and their more

sophisticated deployment of intuition in combination with analysis suggests an important

direction for future research

The small number of accounts of traders monitoring their own emotions as a source of

information about the emotions of other market actors was intriguing These data suggest a

28

possibly productive avenue for future research We do not have evidence of performance

outcomes of predictive uses of empathy in this manner but our findings are consistent with

arguments that the evolution of the human brain has been significantly driven by the need to

predict the behavior of other humans often via subtle cues (eg Nicholson 2000)

We suggest that the identification of links between decision-making performance and

emotion regulation in this study has important implications for theory development in two key

fields First while somewhat tacit in much of the literature the implication of many claims in the

decision-making and behavioral finance literatures is that a range of key decision-making biases

are underpinned by mechanisms which involve emotion processes One relevant explicit example

is Thalerlsquos (1985 1999) account of the role of hedonic editinglsquo in mental accounting and the

disposition effect (the tendency to hold losing assets longer than winning assets) This explains

key biases in terms of the desire to maintain positive hedonic tone There is evidence too of

interpersonal variation in propensity to exhibit such biases for example investors vary in their

propensity to exhibit the disposition effect (Shapira amp Venezia 2001 Weber amp Welfens 2008)

In this study we have seen that traders seek to regulate emotions in order to avoid decision biases

and that higher performing traders typically exhibit more sophisticated emotion regulation

strategies This suggests that it would be productive to investigate the role of emotion regulation

as one key source of interpersonal variation in susceptibility to a range of decision biases

A second implication concerns the role of emotion in expert performance While much

attention has been paid to the nature of cognition in expert performance the expertise literature

hardly considers the role of emotion For example examining the index of the Cambridge

Handbook of Expertise and Expert Performance (Ericsson et al 2006) reveals very few

references to emotion and these are peripheral to the main arguments of the chapters which

contain them Our research suggests first that effective emotion regulation may be an important

29

facet of expert performance and second that greater attention should be paid to the interactions

between emotion emotion regulation and expert intuition Further research could test the

proposition that effective expert intuition is reduced by reliance on defensive emotion regulation

strategies

While our study points to the importance of intuition in traderslsquo work it may be that the

relative importance of intuition and analysis vary with task characteristics such as time span of

decision-making Certainly this seemed to be the view of several senior managers with

responsibility for allocating traders to trading roles The interplay that expert traders described

between intuition and analysis is also intriguing The importance of context to the role of affect

in decision-making has been noted in prior research (Forgas amp George 2001) Further research

could usefully explore this aspect of traderslsquo expertise

This study also contains some potentially important implications for practice First it

points to the importance of learned strategies for emotion regulation and the need for effective

support for their development Second our data directly and indirectly point to the key role of

management in this process Our findings suggest that there may be considerable benefits to

skilled managerial interventions that help to steer effective emotion regulation and support

inexperienced traders in developing emotion regulation skills Additionally managers may be

able to help traders to understand the productive role that critically engaged experience-based

intuition may play in decision-making Our evidence suggests that many high performing traders

deploy a reflective and critical approach to the use and development of intuition well-founded in

experience Managers could help to guide this process through coaching The contextual

dependence of high quality intuitions suggests they are quite domain specific and may not

transfer across contexts As several informants told us this is especially true for traders operating

under different market conditions

30

We heard repeated concerns from senior managers who worried about traders who had

not seen a bear market and would not operate well when that occurred We also heard many

stories of people transferring between trading areas and needing time to re-contextualize

expertise before their intuitions could be considered reliable Thus managers have a role in

helping traders to extend the boundaries of their expertise Given recent events in financial

markets our findings may be relevant to an understanding of how traders react under massively

changed trading conditions and how those reactions might either contribute to or result from

market volatility

This research has some important limitations First although we have argued for the

importance of an account of emotion that includes the experience of emotion as Pham (2004

368) notes the affective system is focused on the present Thus people can be poor at recalling or

predicting emotions There are limits to the human capacity to introspect on emotion processes

and to recall the experience of emotion These limits are also subject to wide individual

differences The capacity for introspection and recall will also vary between individuals For this

reason studies such as ours need to be complemented with more physiologically based research

as well as further qualitative and quantitative studies

Second as in all work contexts traders subscribe to norms of socially sanctioned

behavior and to common narratives about the nature of their work We have not treated emotional

labor as a primary component of traderslsquo work and performance The majority of work

interactions are carried out through highly abbreviated electronic exchanges which provide a poor

medium for the communication of emotion However there is a sense in which traders engage in

emotional labor since especially for novices there are social pressures to comply with display

rules which emphasize the avoidance of displays of strong emotion One common narrative

thread that ran though many traderslsquo accounts of their work was a representation of trading work

31

as principally concerned with rational analysis from which emotions are a dangerous distraction

This narrative seemed particularly strong in the accounts of less experienced traders Although as

we have seen the mask would often slip as they discussed their work Some traderslsquo accounts

were clearly colored by a desire to conform to this mode of self-presentation In consequence it is

possible that in our interviews and during data analysis we were at times unable to distinguish

effectively between defensive denial of emotion and effective regulation of emotion This would

be another avenue for future research

To conclude we know that emotions are a rich source of experience in everyday life but

at the same time in work contexts they can be a source of vulnerability a wayward influence over

judgment and a source of disturbance to process The more ―rational-economic such

environments are the more likely we are to hold such beliefs (Nicholson 2000) Our research

illustrates that this position is false or at best short-sighted In the hyper-rational world of

trading in financial markets we did find some evidence that emotions disturbed performance but

mostly among the inexperienced and un-reflective traders The best traders are able to regulate

emotions effectively and incorporate relevant emotions as information ndash signals or a kind of

radar that contain information about risks what is going on in the minds of others and the weight

and relevance to be accorded to onelsquos own past experience

32

REFERENCES

Bargh J A Chen M amp Burrows L (1996) Automaticity of social behavior Direct effects of

trait construct and stereotype activation on action Journal of Personality and Social

Psychology 71 230-244

Baumeister R F Bratslavsky E Muraven M amp Tice D M (1998) Ego depletion Is the

active self a limited resource Journal of Personality and Social Psychology 74 1252-

1265

Bechara A Damasio A Tranel D amp Damasio A R (1997) Deciding advantageously before

knowing the advantageous strategy Science 275 1293-1295

Bower G H (1981) Mood and memory American Psychologist 36 129 ndash 148

Bower G H (1991) Mood congruity of social judgments In J P Forgas (Ed) Emotion and

social judgments (pp 31ndash53) Oxford Pergamon Press

Braun V amp Clarke V (2006) Using thematic analysis in psychology Qualitative Research in

Psychology 3(2) 77-101

Buck R (1999) The biological affects a typology Psychological Reveiw 106 301-336

Damasio A R (1994) Descartes‟ error Emotion reason and the human brain New York

Putnam

Dane E amp Pratt M G (2007) Exploring intuition and its role in managerial decision making

The Academy of Management Review 32 33-54

De Bondt W Palm F amp Wolff C (2004) Introduction to the special issue on behavioral

finance Journal of Empirical Finance 11 423-427

Dreyfus H amp Dreyfus S (2005) Expertise in real world contexts Organization Studies 26

779-792

Epstein S Pacini R Denes-Raj V amp Heier H (1996) Individual differences in intuitive-

experiential and analytical-rational thinking styles Journal of Personality and Social

Psychology 71 390-405

Ericsson K A Krampe R T amp Tesch-Roemer C (1993) The role of deliberate practice in the

acquisition of expert performance Psychological Review 100 363-406

Ericsson K A (2006) An introduction to the Cambridge Handbook of Expertise and Expert

Performance its development organization and content In K A Ericsson amp N Charness

amp P J Feltovich amp R R Hoffman (Eds) The Cambridge Handbook of Expertise and

Expert Performance 1st ed 3-20 Cambridge Cambridge University Press

Fama E F (1991) Efficient Capital Markets II The Journal of Finance 46 1575-1617

Fama E F (1998) Market efficiency long-term returns and behavioral finance Journal of

Financial Economics Vol 49 283-306

Fenton-OCreevy M Nicholson N Soane E amp Willman P (2005) Traders Risks Decisions

and Management in Financial Markets Oxford Oxford University Press

Finucane M L Alhakami A Slovic P amp Johnson S M (2000) The affect heuristic in

judgments of risks and benefits Journal of Behavioral Decision Making 13(1) 1-17

Forgas JP amp George JM (2001) Affective influences on judgments and behavior in

organizations An information processing perspective Organizational Behavior and

Human Decision Processes 86(1) 3-34

Grandey AA (2000) Emotion Regulation in the Workplace A new way to conceptualize

Emotional Labor Journal of Occupational Health Psychology 5(1) 95-110

33

Grandey A A (2003) When the show must go on surface acting and deep acting as

determinants of emotional exhaustion and peer-rated service delivery Academy of

Management Journal 46 86-96

Gray JA (1999) Cognition emotion conscious experience and the brain In T Dalgleish and

MJ Power (Eds) Handbook of Cognition and Emotion (pp83-102) Chichester England

Wiley

Gross J (2002) Emotion regulation affective cognitive and social consequences

Psychophysiology 39 281

Gross J J amp John O P (2003) Individual differences in two emotion regulation processes

Implications for affect relationships and well-being Journal of Personality and Social

Psychology 85(2) 348-362

Gross J J amp Thompson R A (2007) Emotion regulation Conceptual foundations In J J

Gross (Ed) Handbook of emotion regulation New York NY Guilford Press

Isen A M Shalker T E Clark M amp Karp L (1978) Affect accessibility of material in

memory and behavior A cognitive loop Journal of Personality and Social Psychology

36 1-12

Johnson E amp Tversky A (1983) Affect generalization and the perception of risk Journal of

Personality and Social Psychology 45(1) 20-31

Kavanaugh D amp Bower G (1985) Mood and self-efficacy Impact of job and sadness on

perceived capabilities Cognitive Therapy and Research 9 507-525

Klein G A Calderwood R amp Clinton Cirocco A (1986) Rapid decision-making on the

fireground Human Factors and Ergonomics Society 30th Annual Meeting Vol 1 576-

580

Knorr-Cetina K amp Brugger U (2002) Traders Engagement with Markets A Postsocial

Relationship Theory Culture and Society 19(5-6) 161-185

Labouvie-Vief G (2003) Dynamic integration Affect cognition and the self in adulthood

Current Directions in Psychological Science 12 201-206

Lerner J S amp Keltner D (2001) Fear anger and risk Journal of Personality and Social

Psychology 81(1) 146-159

Lerner J S Small D A amp Loewenstein G (2004) Heart strings and purse strings Carryover

effects of emotions on economic decisions Psychological Science 15(5) 337-341

Lo A Repin D amp Steenbarger B (2005) Fear and greed in financial markets A clinical study

of day traders American Economic Review 95 352-359

Lo A W amp Repin D V (2002) The Psychophysiology of Real-Time Financial Risk

Processing Journal of Cognitive Neuroscience 14 323-339

MacKenzie D (2006) An Engine Not A Camera How Financial Models Shape Markets

Cambridge Mass MIT Press

Mayer JD amp Hanson A (1995) Mood-congruent judgment over time Personality and Social

Psychology Bulletin 21 237-244

Mayer JD DiPaolo M and Salovey P (1990) Perceiving affective content in ambiguous

visual stimuli a component of emotional intelligence Journal of Personality Assessment

54 772-781

Miller G (2003) The cognitive revolution a historical perspective Trends in Cognitive Science

7 141

Muraven M amp Baumeister R F (2000) Self-regulation and depletion of limited resources

Does self-control resemble a muscle Psychological Bulletin 126 247-259

Nicholson N (2000) Managing the Human Animal London ThomsonTexere

34

Peterson R L (2007) Affect and financial decision-making How neuroscience can inform

market participants The Journal of Behavioral Finance 8(2) 70-78

Pham M T (2004) The logic of feeling Journal of Consumer Psychology 14 360-369

Phelps E A (2006) Emotion and cognition Insights from studies of the human amygdala

Annual Review of Psychology 57 27-53

Sayer A (1997) Essentialism social constructionism and beyond The Sociological Review 45

453-487

Shapira Z amp Venezia I (2001) Patterns of behavior of professionally managed and

independent investors Journal of Banking and Finance 25 1573ndash1587

Schunk D amp Betsch C (2006) Explaining the heterogeneity in utility functions by individual

differences in decision modes Journal of Economic Psychology 27 386-401

Schwager J D (1993) Market Wizards Interviews with Top Traders New York Collins

Schwarz N amp Clore G L (1983) Mood misattribution and judgments of well-being

Informative and directive functions of affective states Journal of Personality and Social

Psychology 45 513-523

Seo M G Barrett L F amp Bartunek J M (2004) The role of affective experience in work

motivation Academy of Management Review 29 423-439

Seo M G amp Barrett L F (2007) Being emotional during decision makingmdashgood or bad An

empirical investigation The Academy of Management Journal 50 923-940

Shefrin H (2000) Beyond Greed and Fear Understanding Behavioral Finance and the

Psychology of Investing Boston MA Harvard Business School Press

Stokes A F Kemper K amp Kite K (1997) Aeronautical decision making cue recognition and

expertise under time pressure In C E Zsambok amp G Klein (Eds) Naturalistic Decision

Making pp 183-196 Mahwah NJ Erlbaum

Tamir M (2005) Dont worry be happy Neuroticism trait-consistent affect regulation

and performance Journal of Personality and Social Psychology 89 (3) 449 ndash

461

Thaler R H (1985) Mental accounting and consumer choice Marketing Science 4(3) 199-214

Thaler R H (1993) Advances In Behavioral Finance New York Russel Sage Foundation

Thaler R H (1999) Mental accounting matters Journal of Behavioral Decision Making 12(3)

183-206

Tiedens L amp Linton S (2001) Judgment under emotional certainty and uncertainty the effects

of specific emotions on information processing Journal of Personality and Social

Psychology 81(6) 973-988

Todd P M amp Gigerenzer G (2007) Environments that make us smart Ecological rationality

Current Directions in Psychological Science 16 167-171

Totterdell P Briner R B Parkinson B amp Reynolds S (1996) Fingerprinting time series

dynamic patterns in self-report and performance measures uncovered by a graphical non-

linear method British Journal of Psychology 87(1) 43-60

Weber M amp Welfens F (2008) Splitting the Disposition Effect Asymmetric Reactions

Towards bdquoSelling winners‟ and bdquoHolding Losers‟ Working Paper University of

Mannheim

Wright WF amp Bower GH (1992) Mood effects on subjective probability assessment

Organizational Behavior and Human Decision Processes 52 276ndash91

6

appraisal and immediate affective response may be one input among others into deliberation

Most of our behaviors (and associated decisions) happen in an automatic fashion with minimal

active participation by the conscious self unless we are confronted with a novel situation (Bargh

et al 1996) or uncertainty (Tiedens amp Linton 2001) The brainlsquos capacity for conscious

deliberation is limited and can be depleted much as a muscle can become exhausted (Baumeister

et al 1998 Muraven amp Baumeister 2000) Thus particularly in fast-paced and demanding

environments conscious deliberation is reserved for tasks that are accorded the highest priority

Emotions have an important role as cues to decision making Finucane et al (2000) suggest that

emotions act as a heuristic That is emotions provide an accessible summary of experience

cognitions and memories One might expect that traders given the volume of decision demands

will engage in a great deal of automatic decision making and use emotional cues There is some

empirical evidence supporting this view Lo and Repin (2002) carried out a small-scale study of

the physiological responses (blood pressure and skin conductance) of professional traders (N=10)

to actual market events They found emotional arousal to be a significant factor in the real-time

financial decision-making of both novice and experienced traders Less experienced traders

showed stronger arousal in response to short-term market fluctuations than more experienced

traders indicating that emotions are particularly important in relatively novel situations that

require cognitive effort

Emotion and Decision-Making Performance

There is evidence that emotions affect decision-making performance First there is a

range of evidence that emotions can induce biases in decision-making Emotions can skew

information retrieval For example there is evidence that it is most easy to recall experiences that

are congruent with current emotional state (Bower 1981 1991 Mayer et al 1990) Emotions

also directly bias decision-making for example fear and anger have significant (and opposite)

7

effects on risk perceptions (Lerner amp Keltner 2001 Lerner et al 2004) Additionally emotions

bias the value attached to outcomes For example intense negative emotions enhance valuation of

short-term outcomes regardless of negative long term consequences (Gray 1999) Overall

positive affect tends to be associated with optimistic decision making and negative affect with

pessimistic choices (Isen et al 1978 Johnson amp Tversky 1983 Kavanagh amp Bower 1985

Mayer amp Hanson 1995 Schwarz amp Clore 1983 Wright amp Bower 1992)

Emotions also have a role in risk-related decision making A laboratory study of financial

decision-making under risk found that low levels of emotional experience led to higher levels of

performance through greater risk neutrality due to a more constant association between objective

gain and subjective value (Schunk amp Betsch 2006) Lo et al (2005) found clear associations

between day-traderslsquo emotions their decision making and performance There was evidence that

positive decision-making outcomes as assessed by profits and losses were associated positively

with pleasant affect (eg content) and negative outcomes with unpleasant affect (eg bored)

Furthermore investors who experienced more intense positive and negative emotional reactions

to gain and loss were poorer performers than those with more attenuated emotional responses

The authors suggested that rapid emotional decision making is unsuited to the complex

information-rich environment of trading The trading practitioner literature also tends to promote

the view that emotions are detrimental to decision making exemplified in the following quotation

from highly rated trader Bruce Kovner ―Whenever a trader says bdquoI wish‟ or bdquoI hope‟ he is

engaging in a destructive way of thinking because it takes away from the diagnostic thought

process (Schwager 1993 82) In contrast Seo and Barrett (2007) carried out a study of

investment club members using an internet-based investment simulation accompanied by

emotional-state surveys They found that individuals who experienced more intense emotions

achieved higher decision-making performance

8

Thus while there is ample evidence that emotions affect decision-making performance

including for traders the evidence on the nature of that impact is mixed While there is evidence

for the biasing effect of emotions there is also evidence that we rely on emotional cues in rapid

automatic decision-making and they confer a tangible advantage to everyday decision-making

(Bechara et al 1997)

Research into the nature of expertise has tended to characterize intuition (a form of

experientially-based pattern recognition linked to the affectively cued system 1 (Dane and Pratt

2007)) as integral to expert performance ndasheg Dreyfus amp Dreyfus 2005 Klein et al 1986

Stokes et al 1997) Dane and Pratt (2007) note an important distinction between on the one

hand the decision heuristics literature which mainly supports a view of intuitive decision-

making as inferior to more rational models and on the other the literature on expertise which

emphasizes the central role of intuition in expert performance A crucial difference between these

literatures is the different emphasis placed on research method and context Research on decision

heuristics is often context free and relies heavily on experiments using subjects who are

inexperienced in the tasks studied There is also evidence that some of the key cognitive biases

identified as maladaptive products of heuristic reasoning in experimental settings either do not

occur or lead to better outcomes when decision-making is studied in the field or studied using

approaches that approximate real life contexts (Todd amp Gigerenzer 2007) The expertise

literature in contrast places great emphasis on domain specific knowledge and skills on the

development of complex cognitive schema that enable rapid associative pattern recognition and

on the activation of extensive and complex behavioral repertoires Dane and Pratt (2007) argue

that in consequence intuition will be more likely to function as an effective component of

decision-making in performance domains that require significant experience and complex domain

relevant schema a description which fits the world of financial trading

9

In summary the emotions literature gives considerable support to the idea that emotions

have multiple critical impacts on decision-making Some of these can be characterized as bias

with the potential to be detrimental to decision-making performance However it is also apparent

that there is an alternative position it is not emotions per se that are detrimental to decision-

making performance but rather that expertise and the regulation of emotions determine whether

emotions have positive or negative impacts on decision performance

Emotion Regulation

Accounts of emotions as bias focus primarily on the potential for emotions to have a

negative influence on performance By contrast accounts of emotions as information focus

primarily on the valuable role of emotions in encapsulating prior relevant experience In

principle these two perspectives may not incompatible and effective emotion regulation may

have a role in reducing the biasing effect of emotion while retaining sensitivity to the information

which emotions may carry It thus seems likely that the regulation of emotion may play an

important role in emotion performance effects Gross (2002 Gross amp Thompson 2007)

distinguishes a series of different stages in emotion episodes and five associated emotion

regulation strategies The model suggests that people both choose and modify situations

Situations require attention and appraisal which leads to an emotional response

Attempts to manage emotions may focus on any of the stages indicated in the above

model One approach to managing emotions is to select avoid or modify situations Other

approaches include focusing attention on emotionally salient elements of a situation and where

emotional responses might be difficult to cope with reframing situations to modify the emotional

response It is also possible to avoid emotional responses by refocusing attention elsewhere Each

of these strategies could lead to responses being modulated or suppressed Gross and Thompson

(2007 16) make clear that this model of emotions and their regulation is something of a

10

simplification However the model usefully illustrates the central role of emotion regulation in

decision-making

In addition to theoretical modeling there is empirical evidence for a relationship between

strategies for emotion regulation and a range of important outcomes Recent research has paid

particular attention to the difference in outcomes between antecedent-focused emotion regulation

strategies which seek to change emotions before emotion responses have become fully activated

and response-focused regulation strategies which modify behavior and emotion expression once

the emotion response is underway Emotion regulation strategies have been shown to have

differential effects on outcomes including cognitive performance health and qualities of social

interaction (Gross and Thompson 2007) In the domain of work performance much attention has

focused on the emotional labor required by customer service interactions Here emotion

regulation has been characterized as a process of deep and surface acting Surface acting is the

faking of emotion display to accord with organization display rules Deep acting involves

modifying inner feelings Grandey (2000) considers emotional labor as a subset of emotion

regulation and equates antecedent-focused and response-focused regulation with deep and surface

acting respectively In a study of front-line service workers Grandey (2003) found antecedent-

focused emotion regulation was associated with greater effectiveness in relating to customers in a

warm friendly manner while response-focused emotion regulation was associated with emotional

exhaustion and greater tendency to break character and reveal negative emotions in a service

encounter This result supports Grosslsquos earlier work (2002) There is also some evidence on

emotion regulation and financial decision-making Seo and Barret (2007) found that investors

who were better able to identify and discriminate among their current feelings achieved superior

decision-making performance They argued that this relationship was mediated by effective

regulation of the influence of feelings on their decision-making

11

In the present study we go beyond the study of emotion regulation in a context of work

performance that depends primarily on social interaction In contrast to emotional labor studies

which focus on the context of interpersonal interaction most trading nowadays (and in all cases

we studied) is conducted electronically via computer or through highly abbreviated and

formalized electronic messages with counterparties Rather than depending on appropriate

emotion display in the context of customer interaction or negotiating with counterparties trader

performance depends on selecting optimal trading strategies in the face of complex cognitive

demands and the need to process significant amounts of information with uncertain relevance

(Knorr-Cetina amp Bruegger 2002) We now turn to the present study

THE STUDY AND METHODS

The data reported in this paper were collected as part of a large multifaceted study of the

role and behavior of traders working in investment banks For this paper we have returned to this

data corpus to examine the considerable amount that traders told us about their work and

emotion an aspect touched on only superficially in previous analysis of this data (see Fenton-

OCreevy Nicholson Soane and Willman 2005 for an extended account of the study)

Participants

Participants were sampled from four leading investment banks with offices in the City of

London Three banks were American and one was European Managers in each organization were

asked to select a representative sample of traders from a range of markets trading in stocks

bonds and derivatives The mean age of participants was 3281 years (sd = 491) There was

variation in traderslsquo experience with overall tenure (including time with previous employers) in a

range from 6 months to 30 years and a mean job tenure of 780 years (sd = 558) The trader

sample comprised 116 men (983) and 2 women (17) The participants were traders in

equities bonds and derivatives most engaged in either market making or proprietary trading or

12

both We gathered information on individual trader characteristics and performance and carried

out semi-structured interviews with each trader and with a further 10 senior managers Where

traders were also managers we interviewed them twice once as a trader and once as a manager

Data

Qualitative data Interviews lasted between 30 and 90 minutes They were recorded and

transcribed in full The interviews ranged over multiple aspects of the traderslsquo roles and work

The data set for this study consisted of the portions of the interviews relevant to the role of

feelings in traderslsquo work and decision making Traders were asked to describe the range of

emotions they experienced during trading Follow-up questions encouraged them to explore the

long-term and short-term effects of emotions on their decision making and trading strategy the

role of intuition in their trading and the impact of emotions on performance Managers were

asked to describe how they evaluated and managed trader performance Again this often

produced talk about traderslsquo feelings and how they were managed

Performance data Hard performance data for traders are difficult to obtain Measures

such as value at risk trading outcomes and profit and loss are highly confidential in this setting

and were not available to us so we used total remuneration as our measure of trader performance

We felt this to be a reasonable proxy for decision-performance since a high proportion of total

remuneration is a variable annual performance linked bonus and the non-bonus elements tend to

reflect longer term financial performance in this very performance oriented sector We have

treated this variable as an indicator of expertise which Ericsson (2006) defines as reliably

superior performancelsquo Traders were asked to state their income including bonus in terms of

four categories (1 pound50000 - pound99999 (N = 4) 2 pound100000 to pound299999 (N = 41) 3 pound300000-

pound499999 (N = 34) 4 more than pound500000(N = 38) One trader declined to provide this

information

13

Analysis

The raw data were the full transcripts of all interviews We used a thematic analysis

approach which we judged to be particularly well suited to the present study As Braun and

Clarke (2006 78) note thematic analysis does not rest on a single epistemic position but can

span both realist and constructivist approaches We take the position that emotions have both a

measurable biological reality and exist in the realm of socially constructed personal experience in

which emotions have personal and social meaning

Data were open-coded by each author separately then in discussion using the NVIVO

program Common statements were identified and used as the basis for a first set of coding

categories which were subsequently refined and consolidated Coding categories were thus both

emergent from the interviews and drew on constructs identified in the literature (eg approaches

to emotion regulation) relevant to emerging themes Thus coding was both theoretical and

inductive As we analyzed the data and drew tentative conclusions we explicitly sought

disconfirming evidence to test the robustness of our insights In a later stage of analysis we

partitioned the sample into groups of low (lt5 years n=25) medium (5 to 10 years n=48) and

high experience (gt10 years N=45) and into groups of low (remunerationlt pound300k N=45) medium

(pound300k- pound500k N=34) and high expertise (gt pound500k N=38) We compare interview responses of

three specific groups inexperienced low paid traders (N=18) highly experienced but low paid

traders (N=15) and high paid traders (N=38) The remainder of the sample were medium

experience and pay There were no low experience high pay traders We chose the three

comparison groups to provide maximal contrast in differentiating the characteristics associated

with different levels of experience and expertise respectively

14

In Table 1 we summarize our key findings and the nature of the evidence for each finding

In the final column we note our sense of the strength of the evidence for each finding This

represents a qualitative conclusion arrived at though discussion between the authors and drawing

on quantity consistency importance and clarity of supporting data and existence of any

disconfirming evidence In the next section of the paper we discuss these findings and the

evidence for them in more detail Direct quotes are verbatim accompanied by the case number of

the respondent and their classification in terms of experience and pay level

TABLE 1 ABOUT HERE

TRADERSrsquo UNDERSTANDINGS OF EMOTION IN THEIR TRADING PRACTICE

Emotional experience and regulation

For many traders especially the less experienced trading is marked by significant and

persistent emotional responses to successes and setbacks It is relevant to note the distinction

between mood and emotion since both were relevant to traders Mood can be understood as a

relatively diffuse emotional climate which persists over time and not anchored to specific

situations or cognitions In contrast emotions typically have specific objects and give rise to

behavioral response tendencies relevant to those objects (Totterdell Briner et al 1996)

ldquoWhen you lose money you could sit down and cry Anybody who says you couldn‟t

isn‟t being honest with you Of course when it‟s good it‟s fantastic The highs and

lows of a trader‟s life are euphoria or absolute dismayrdquo 106 high experience

medium pay

While these emotional responses would often be triggered by specific events or series of

events in many cases the impact on mood would persist for significant periods with

consequences for subsequent trading behavior For example one manager described a trader

15

working for him as ―having been in the wilderness his confidence totally shattered for about

two years before slowly recovering from a string of losses Many talked about needing weeks or

even months to recover from the impact of major losses especially early in their careers Others

talked about the dangers of false confidence or euphoria which could persist for some time after a

big win

ldquoPeople get a bit arrogant when they have good times but this can be dangerous

because then they stop thinking as muchrdquo 18 medium experience medium pay

ldquoI tend to feel more cautious when losing moneyhellipIf I am having a down month I‟ll

look at trades which I would do if I was having a good month and say I don‟t like it

enough to take the risk on it I become more selective more risk averse and to do a

trade I need to see more than one reason why a trade will work and then might put it

on but not in a huge size When making money I can be more slack 29 high

experience high pay

However our data also suggest emotion regulation is critical to moderating the impact of

emotions on traderslsquo decision making Senior traders and trader managers frequently talked about

the way in which they had developed a capacity to regulate their own emotions and trade more

evenly regardless of success and setbacks

ldquoYou learn to be able to deal with emotions It doesn‟t get to me as much There

were situations when I was extremely stressed up and then you feel physically ill and

you really feel on the verge of throwing up But that was a long time ago and doesn‟t

happen so much now You have seen the ups and downs more You have experienced

them and in a way you are probably more prepared for it and you are aware that

every now and then it will happenhellip but it doesn‟t get to you all that much because

you are aware that it will happen 6 medium experience high pay

16

We examined emotion regulation and its relevance to performance further by considering

data from the three comparison groups (based on experience and pay) We noticed some

important differences in the way in which these groups discussed the interaction between

emotion trading and the use of intuition First there seemed to be notable differences in the

strategies employed for emotion regulation which we describe below in the language of the

Gross and Thompson model (2007) When asked directly about emotion traders in the low

experience group typically started by presenting themselves as fairly immune to the impact of

emotion on their trading However as the interview progressed they would often reveal rather

more vulnerability to emotions than they had claimed initially Take for example this trader who

had been trading for a little less than 4 years -

ldquoI‟m bit of a cold fish I don‟t think emotions greatly affect my decision-making If

you are making money you are achieving your objectivehellip

[But later]

hellipWhen you lose money it can be horrendous violent mood swings You don‟t know

what to do when you lose moneyrdquo 38 low experience low pay

There tended to be two responses types when these traders did talk about their emotions

Some in the low experience low pay group did not talk at all about actively managing their

emotions Others talked about removing themselves from situations when their emotions became

a problem (situation modification) or avoiding situations entirely which make them feel bad

(situation selection)

ldquoI think there is a strong emotional element to trading I think that anyone who‟s

doing it properly and has got their head screwed on is doing everything they can

consciously to overrule that and if I feel that I‟m trading emotionally I will walk off

17

the desk have a glass of water walk up and down the street and then come back and

make decisions when I‟m hopefully not emotionalrdquo 43 low experience low pay

Traders in the experienced group more commonly talked about strategies for emotion

regulation However the nature of these strategies tended to vary between the low paid and high

paid groups In the high experience low paid group traders seemed to find it hard to articulate

how they managed their emotions and the emotion regulation strategies they identified were

predominately situation avoidance situation modification and response modulation

ldquoIf you get two or three decisions wrong you find you might not take a risk for a

month until you build up your confidence There‟s definitely a lot of confidence

involvedrdquo 104 high experience low pay

ldquoI try and keep my emotions under tight controlrdquo 105 high experience low pay

There is a marked contrast in the discourse of the high performing traders who often

showed a greater willingness to reflect on their emotion-driven behavior (the two exceptions to

this were traders with whom we had only short interviews with little opportunity for extended

reflection rather than any denial of the role of emotion) Emotion regulation for these traders

tended to focus mainly on how they directed their attention (attentional deployment) and how

they framed experiences of loss and gain (cognitive change)

ldquoBig losses and big gains can swap around fairly quickly and once you understand

that then you stop concentrating on the loss and you start concentrating more on how

to make money back hellip One big trade is not going to make anyone and one big loss

doesn‟t destroy yourdquo 15 high experience high pay

ldquoExperience definitely helps having traded through the crash etc Youve seen

different scenarios and newer people its like oh my god its the end of the world

whereas there is life after death and so I think that type of experience helps It doesnt

18

necessarily help the new situation on what to do but it just helps your judgmentrdquo 55

high experience high pay

There was a notable absence of avoidant behavior in this group Several participants told

stories which implied a significant degree of persistence in the face of negative emotion

ldquoI had one very bad year from which I learned quite a lot I learned that the

overshooting can go on for a very long time it can be very painful you can hit risk

limits hellip I did not want to get out of the trades so kept the trades and then next year

they made more money than they lost I don‟t think I panicked but I was getting calls

from the CEO Reason prevailed in the end Emotionally it was not easy to cope

with There were times when the desk was down close to $100m I lost almost that

much in days I was under a lot of pressure from New York because they did not

understand my positions but in the end we managed to keep the positions and made

money the next year The hardest thing was persuading others that I had a good

traderdquo 14 high experience high pay

This willingness among some of the high performing traders to experience negative

emotion in order to achieve longer term goals is consistent with Labouvie-Vieflsquos (2003)

argument that positive self-development requires not just strategies to optimize positive affect

but also the ability to tolerate tension and negativity to achieve long term goals

However there may be another important reason why response modulation strategies are

maladaptive for traders As we have seen above while poorly regulated emotions carry over to

subsequent trading and risk biasing subsequent trading behavior emotion cues generated by

reactions to information relevant to current trading under time constraints play an important role

in guiding attention and rapidly choosing appropriate action Both poor regulation of non-

19

relevant emotions and recourse to the attempted suppression of all feeling run the risk of masking

these important cues

The Role of Managers in Emotion Regulation

Further evidence of the importance of emotions and their regulation to trader performance

came from interviews with trader managers A few managers described their role in primarily

technical terms focusing on risk management and personal supervision of problematic trades

However many of those we interviewed clearly saw regulating the emotions of traders who

worked for them as a key element in managing trader performance

ldquoI have to play the role of director of emotions in the sense that when they are down

you have to boost their morale and when they are too excited they want to do stupid

things I have to cool them downrdquo 119 senior manager

ldquoI care deeply because I have tremendous pride in the people herehellipThe stress is

generated by fear entirely and it‟s fear of what I guess everyone has their

insecurities whether it‟s being fired losing lots of money and appearing stupid in

front of their peer group Whatever it is it‟s definitely fear and if you can take the

fear out of the situation they perform betterrdquo 123 senior trader manager high

experience high pay

Many traders described such episodes of managerial intervention as crucial to their

learning and development For example-

ldquoI lost $1m in the first 10 days of the year This was at a time when if you made $1m

in a year that was huge I was devastated and my boss asked me for lunch at the

weekend - I thought that was the end of my career My boss said bdquoa lot of the guys

think you‟re OK but they are worried you are going to be afraid to trade that you‟re

20

going to be gun shy and lose your confidence We want you to know that we like you

and if you think you‟ve got to buy them buy them and if you‟ve got to sell them sell

them but whatever you do don‟t stop trading‟ So that was a huge relief Since then I

don‟t get too depressed about losing money although there are always good days

and bad daysrdquo 25 low experience medium performance

Other managers clearly gave thought to the relative strengths and weaknesses of more

intuitive versus more analytical traders in their decisions about matching traders to roles -

ldquoA gut trader should trade a liquid market - he might change his feel so he needs to

get out The analytical trader who thinks much more about what he‟s doing will

change their mind less often and trade with a different time frame A gut trader can

be bullish in the morning The analytical trader will look at something for a week

and then put on a position - less important to get in and out He doesn‟t need to be in

a liquid market - in an emerging market you need a more analytical traderrdquo 122

Manager

ldquoDerivatives are very quantitative and people think if you have a PhD you will be

very good because you have an understanding of options theory but this is not

always the case and you tend to overlook things Although you can put the

parameters into the model there are still a lot of things which are uncertain

Sometimes adding a more qualitative feel to it ndashbdquoyes that‟s what the model says but

the risk doesn‟t look right‟ hellip I tend to have a mixture of people on the desk - those

who are more quantitative and those who are more common sense or gut instinct

traders Having the blend is quite useful for bouncing ideasrdquo 124 Manager

These reflections have implications for management strategies in trading environments or

indeed any others where the main role of the operative is complex decision-making under

21

constraints of time and uncertain and incomplete information We consider these points further in

our discussion

Emotional Cues and the Use of Intuition

The second broad theme concerned the role of emotional cues in traderslsquo decision-

making Many of the traders discussed this aspect of emotion as intuition Traderslsquo own accounts

and conceptualizations of intuition fit well with Dane and Prattlsquos (200740) definition of intuition

as ―affectively charged judgments that arise through rapid non-conscious and holistic

associations For example -

ldquo[W]ithout a doubt some of the best bargains are the ones you dont do You know

theyre bad bargains You know It‟s a gut feel Youve looked at the playing field and

you just know this is a bad bargainrdquo 106 high experience moderate pay

Some of the traders see a more subtle and sophisticated role for emotions which represent

an unconscious drawing on experience -

ldquoI think many people do say theyre gut-feel traders but perhaps theyre not analyzing

what theyre actually thinking and theyre seeing a lot of customer flow and a lot of

buyers and they probably dont necessarily realize the reasons why they want to buy

But there are very good traders that say theyre trading off gut feel that I believe

actually have probably reasonable information reasonable thoughts behind it but

they wouldnt literally toss a coinrdquo 55 high experience high pay

Feelings are also seen as a kind of radar directing attention and shaping perceptions

around opportunities to enable them to be promptly seized

ldquoI think what a trader has to have is not necessarily this gut feeling but this nose for

opportunities If an opportunity comes along you have to be able to spot it and see it

22

and sometimes people you typically find in this business - an opportunity is there and

they cant see it and then its taken by someone else and its like oh yeah that was a

good idea but it is gonerdquo 58 high experience low pay

Not only do feelings act as a kind of radar directing attention but they do so in a way that

enables rapid decision making under time pressure As one trader noted -

ldquoTrading includes stuff which is beyond trading Trading is when you make decisions

involving financial risk that have two qualities you have to make them in someone

else‟s time schedule not your own and when you make a decision you have to be

confident when you have incomplete or imperfect information and therefore there

must be some kind of intuitive or qualitative elementrdquo 121 high experience high pay

Experienced traders made much more reference to intuition or gut feellsquo as they often

phrased it than less experienced traders However again there were important differences

between low and high paid traders in the high experience group Low paid traders who talked

about the use of intuition often talked of it in terms of a rather mysterious process You either had

a feeling or not For example

ldquoIt‟s almost like a sixth sense Something comes over you and you feel like - yes I

know they‟re going to be looking to buy these later on or looking to sell these later

onrdquo 116 high experience low pay

By contrast the top paid group tended to reflect critically about the origins of their

intuitions and to bring them together with more objective information -

ldquoIf I do fancy a stock - you have a feeling it feels right it has done nothing for like

two or three months and you‟ve seen sellers and they start to dwindle and it is just

stagnant and then you have a look on the charts you refer to the technical side as

well as the emotional side of the trade So you know a combination of technical and

23

emotional as well as what the analyst thinks as well so you sort of bring the

instruments you have available to you to make the decision rather than the snap

[snaps his finger] I fancy buying thatrdquo 101 high experience high pay

ldquoI may examine opportunities based on intuition that something is going to happen

but the decision is based on something I think is rationalrdquo 68 medium experience

high pay

Reported use of intuition does seem to increase with trader experience However traderslsquo

engagement with their feelings is qualitatively different between low and high performers High

performing traders seem to engage with their intuitions at a meta-cognitive level and make

judgments about the relevance of these feelings to the decision at hand This is consistent with

the growing literature on expertise which points to experience as a necessary but insufficient

condition for the development of expertise and points to the role of extended critical engagement

with practice in developing expertise (Ericsson 2006 Ericsson Krampe amp Tesch-Roemer

1993)

Traders were not universally positive about the role of intuition in market decision making

Some believed reliance on such feelings yields poor outcomes -

ldquoMany traders feel that models have been developed by academics who do not know

markets and [traders] think that gut feeling is more important My experience is that

this is 100 wrong and computers can make better decisions than tradersrdquo 37

medium experience medium pay

Overall however the data support a picture of expert traders having a meta-cognitive

engagement with emotion regulation This process entails discrimination between emotions in

terms of their relevance to the decision at hand and effective strategies for emotion regulation to

enhance performance

24

Empathy

The third identified theme was empathy monitoring own emotions as information

about what other market players might be feeling Only five traders explicitly described

using their own capacity for empathy as a decision making tool Although not frequent in

our data these examples are important illustrating that there is a path for traders beyond

simply seeking to eliminate or reduce the intensity of their emotions These traders

fostered feelings as a source of information about other market actors which they managed

and used in a self-aware analysis One trader described using his own fear as an indicator

of fear in the market Another described actively imagining the feelings of other market

actors ―trying to put myself in [the Bank of England Governorlsquos] feet to develop a feel for

how he feels and thinks 14 high experience high pay

Three traders talked about an emotional affinity with the feelings of people in

national markets (Spain 34 high experience medium pay Italy 70 medium experience

low pay and Japan 117 high experience medium pay) with whom they shared a common

culture and propensity to react emotionally in similar ways to the same market events This

group was small but these data broaden the picture of traders reasoning with emotionlsquo

and offer a potentially rich and fruitful avenue for future research

DISCUSSION AND CONCLUSIONS

To ask whether emotion disturbs or aids traderslsquo decision-making is to ask the wrong

question Traderslsquo emotions and cognition are inextricably linked Therefore a more productive

question to ask in this context is whether there are more or less effective strategies for managing

and using emotion in financial decision-making This has been the thrust of our analysis which

25

sought to move beyond previous work that simply characterizes emotional arousal as detrimental

to performance (eg Lo et al 2005 Schunk and Bersh 2006) The study contributes to our

understanding of the role of emotions in work and decision-making in several distinct ways In

contributing to our understanding of the role of emotion at work this study has particular

relevance in that it considers a work domain which has been theorized as strongly normatively

rational as opposed to a work domain (such as negotiation or customer service) where

performance is primarily dependent on effective social interaction However it is clear from this

study that even within such an analysis-intensive domain as financial trading emotion plays a

central role Traders and their managers are frequently preoccupied with the effective regulation

and use of emotions in their work Our work points to the value of a more nuanced understanding

which considers the role of emotions in decision-making the differential impact of various

emotion regulation strategies the conditions under which gut-feellsquo may support effective

decision-making and the role of empathic responses in understanding the behavior of other

market actors

Effective emotion regulation seems to be a critical success factor in trading for our

findings suggest that the strategies for emotion regulation adopted by expert higher performing

traders are qualitatively different from those of lower performing traders In particular higher

performers are more inclined to regulate emotions through attentional deployment and cognitive

change and may display a willingness to cope with negative feelings in the interests of

maintaining objectivity and pursuing longer term goals The kind of attention and appraisal-

focused emotion regulation strategies used by high-performing traders do not seem to be too

cognitively expensive and are effective in reducing negative experience of emotion (Gross

2002) By contrast less expert traders engage either in avoidant behaviors such as walking

away from the desk or invest significant cognitive effort in modulating their emotional

26

responses This extends previous findings (eg Grandey 2003) concerning the performance

benefits of antecedent versus response-focused emotion regulation in the context of emotion

labor to the very different context of financial decision-making Our findings also suggest that

willingness to endure negative feelings in pursuit of long-term goals may be more adaptive than

purely defensive strategies aimed at maintaining positive feelings (Labouvie-Vief 2003 Tamir

2005)

This study also provides evidence that more effective emotion regulation strategies can be

learned in a financial decision-making context While an individuallsquos preferred approach to

emotion regulation is likely to be influenced by personality traits neuroticism and extroversion in

particular (Gross amp John 2003) our interviews with traders and their managers also point to the

importance of traderslsquo learned strategies for emotion regulation Importantly our study also

suggests that defensive emotion regulation strategies may be problematic because they reduce

opportunities to exercise expert intuition

These findings go well beyond prior research on emotion regulation and performance

(eg Grandey 2003) which has a primary focus on performance in the context of interpersonal

interaction Our findings uniquely address the performance of professional traders for whom

performance is not primarily dependent on interpersonal interaction and which has been

theorized as strongly rational involving the selection of optimal strategies in the face of complex

cognitive demands and requiring attention to a large volume of information with uncertain

relevance

Turning to intuition traders in our study mirror the balance of opinion in the research

literature on intuition They are equivocal about whether feelings and hunches about appropriate

courses of action lead to better or worse outcomes than purely rational analysis There were

strong feelings on both sides with traders being quite evenly divided between the two camps

27

However again our study suggests the importance of a more nuanced approach than simply

asking whether reliance on intuition is good or bad and points towards the conditions in which

reliance on intuitive judgment may be more and less effective The findings suggest that one

characteristic of higher performing traders may be a greater willingness to reflect critically about

their intuitions and feelings about trading These traders often reported relying on intuition but

they tend to weigh their feelings critically alongside other evidence and to reflect about the

provenance of those feelings Lower performing traders may rely on feelings alone and show

less propensity to think critically about the source of hunches This reflection by expert traders

about the provenance of feelings may be particularly salient given Schwarz and Clorelsquos (1983

2003) finding that the impact of emotions on behavior is reduced or disappears when the

relevance of those emotions is explicitly called into question

That traderslsquo reliance on affective cues in decision-making can support effective

performance is consistent with Damasiolsquos observation that deciding advantageously depends on

the use of affective cues in both learning and deciding (Bechara et al 1997 Damasio 1994)

There is increasing evidence that humans are naturally proficient in the ability to acquire

expertise and that encapsulation of experience in expert intuition and perception via system one

provides a means of by-passing cognitive limits (Ericsson 2006) The nature of expertise could

counteract the inherent environmental uncertainties that Tiedens and Linton (2001) identified as

leading to more conscious appraisal of information While not an unequivocal result our finding

of greater critical engagement among higher performing traders with intuitions and their more

sophisticated deployment of intuition in combination with analysis suggests an important

direction for future research

The small number of accounts of traders monitoring their own emotions as a source of

information about the emotions of other market actors was intriguing These data suggest a

28

possibly productive avenue for future research We do not have evidence of performance

outcomes of predictive uses of empathy in this manner but our findings are consistent with

arguments that the evolution of the human brain has been significantly driven by the need to

predict the behavior of other humans often via subtle cues (eg Nicholson 2000)

We suggest that the identification of links between decision-making performance and

emotion regulation in this study has important implications for theory development in two key

fields First while somewhat tacit in much of the literature the implication of many claims in the

decision-making and behavioral finance literatures is that a range of key decision-making biases

are underpinned by mechanisms which involve emotion processes One relevant explicit example

is Thalerlsquos (1985 1999) account of the role of hedonic editinglsquo in mental accounting and the

disposition effect (the tendency to hold losing assets longer than winning assets) This explains

key biases in terms of the desire to maintain positive hedonic tone There is evidence too of

interpersonal variation in propensity to exhibit such biases for example investors vary in their

propensity to exhibit the disposition effect (Shapira amp Venezia 2001 Weber amp Welfens 2008)

In this study we have seen that traders seek to regulate emotions in order to avoid decision biases

and that higher performing traders typically exhibit more sophisticated emotion regulation

strategies This suggests that it would be productive to investigate the role of emotion regulation

as one key source of interpersonal variation in susceptibility to a range of decision biases

A second implication concerns the role of emotion in expert performance While much

attention has been paid to the nature of cognition in expert performance the expertise literature

hardly considers the role of emotion For example examining the index of the Cambridge

Handbook of Expertise and Expert Performance (Ericsson et al 2006) reveals very few

references to emotion and these are peripheral to the main arguments of the chapters which

contain them Our research suggests first that effective emotion regulation may be an important

29

facet of expert performance and second that greater attention should be paid to the interactions

between emotion emotion regulation and expert intuition Further research could test the

proposition that effective expert intuition is reduced by reliance on defensive emotion regulation

strategies

While our study points to the importance of intuition in traderslsquo work it may be that the

relative importance of intuition and analysis vary with task characteristics such as time span of

decision-making Certainly this seemed to be the view of several senior managers with

responsibility for allocating traders to trading roles The interplay that expert traders described

between intuition and analysis is also intriguing The importance of context to the role of affect

in decision-making has been noted in prior research (Forgas amp George 2001) Further research

could usefully explore this aspect of traderslsquo expertise

This study also contains some potentially important implications for practice First it

points to the importance of learned strategies for emotion regulation and the need for effective

support for their development Second our data directly and indirectly point to the key role of

management in this process Our findings suggest that there may be considerable benefits to

skilled managerial interventions that help to steer effective emotion regulation and support

inexperienced traders in developing emotion regulation skills Additionally managers may be

able to help traders to understand the productive role that critically engaged experience-based

intuition may play in decision-making Our evidence suggests that many high performing traders

deploy a reflective and critical approach to the use and development of intuition well-founded in

experience Managers could help to guide this process through coaching The contextual

dependence of high quality intuitions suggests they are quite domain specific and may not

transfer across contexts As several informants told us this is especially true for traders operating

under different market conditions

30

We heard repeated concerns from senior managers who worried about traders who had

not seen a bear market and would not operate well when that occurred We also heard many

stories of people transferring between trading areas and needing time to re-contextualize

expertise before their intuitions could be considered reliable Thus managers have a role in

helping traders to extend the boundaries of their expertise Given recent events in financial

markets our findings may be relevant to an understanding of how traders react under massively

changed trading conditions and how those reactions might either contribute to or result from

market volatility

This research has some important limitations First although we have argued for the

importance of an account of emotion that includes the experience of emotion as Pham (2004

368) notes the affective system is focused on the present Thus people can be poor at recalling or

predicting emotions There are limits to the human capacity to introspect on emotion processes

and to recall the experience of emotion These limits are also subject to wide individual

differences The capacity for introspection and recall will also vary between individuals For this

reason studies such as ours need to be complemented with more physiologically based research

as well as further qualitative and quantitative studies

Second as in all work contexts traders subscribe to norms of socially sanctioned

behavior and to common narratives about the nature of their work We have not treated emotional

labor as a primary component of traderslsquo work and performance The majority of work

interactions are carried out through highly abbreviated electronic exchanges which provide a poor

medium for the communication of emotion However there is a sense in which traders engage in

emotional labor since especially for novices there are social pressures to comply with display

rules which emphasize the avoidance of displays of strong emotion One common narrative

thread that ran though many traderslsquo accounts of their work was a representation of trading work

31

as principally concerned with rational analysis from which emotions are a dangerous distraction

This narrative seemed particularly strong in the accounts of less experienced traders Although as

we have seen the mask would often slip as they discussed their work Some traderslsquo accounts

were clearly colored by a desire to conform to this mode of self-presentation In consequence it is

possible that in our interviews and during data analysis we were at times unable to distinguish

effectively between defensive denial of emotion and effective regulation of emotion This would

be another avenue for future research

To conclude we know that emotions are a rich source of experience in everyday life but

at the same time in work contexts they can be a source of vulnerability a wayward influence over

judgment and a source of disturbance to process The more ―rational-economic such

environments are the more likely we are to hold such beliefs (Nicholson 2000) Our research

illustrates that this position is false or at best short-sighted In the hyper-rational world of

trading in financial markets we did find some evidence that emotions disturbed performance but

mostly among the inexperienced and un-reflective traders The best traders are able to regulate

emotions effectively and incorporate relevant emotions as information ndash signals or a kind of

radar that contain information about risks what is going on in the minds of others and the weight

and relevance to be accorded to onelsquos own past experience

32

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trait construct and stereotype activation on action Journal of Personality and Social

Psychology 71 230-244

Baumeister R F Bratslavsky E Muraven M amp Tice D M (1998) Ego depletion Is the

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1265

Bechara A Damasio A Tranel D amp Damasio A R (1997) Deciding advantageously before

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Bower G H (1981) Mood and memory American Psychologist 36 129 ndash 148

Bower G H (1991) Mood congruity of social judgments In J P Forgas (Ed) Emotion and

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Braun V amp Clarke V (2006) Using thematic analysis in psychology Qualitative Research in

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Buck R (1999) The biological affects a typology Psychological Reveiw 106 301-336

Damasio A R (1994) Descartes‟ error Emotion reason and the human brain New York

Putnam

Dane E amp Pratt M G (2007) Exploring intuition and its role in managerial decision making

The Academy of Management Review 32 33-54

De Bondt W Palm F amp Wolff C (2004) Introduction to the special issue on behavioral

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Dreyfus H amp Dreyfus S (2005) Expertise in real world contexts Organization Studies 26

779-792

Epstein S Pacini R Denes-Raj V amp Heier H (1996) Individual differences in intuitive-

experiential and analytical-rational thinking styles Journal of Personality and Social

Psychology 71 390-405

Ericsson K A Krampe R T amp Tesch-Roemer C (1993) The role of deliberate practice in the

acquisition of expert performance Psychological Review 100 363-406

Ericsson K A (2006) An introduction to the Cambridge Handbook of Expertise and Expert

Performance its development organization and content In K A Ericsson amp N Charness

amp P J Feltovich amp R R Hoffman (Eds) The Cambridge Handbook of Expertise and

Expert Performance 1st ed 3-20 Cambridge Cambridge University Press

Fama E F (1991) Efficient Capital Markets II The Journal of Finance 46 1575-1617

Fama E F (1998) Market efficiency long-term returns and behavioral finance Journal of

Financial Economics Vol 49 283-306

Fenton-OCreevy M Nicholson N Soane E amp Willman P (2005) Traders Risks Decisions

and Management in Financial Markets Oxford Oxford University Press

Finucane M L Alhakami A Slovic P amp Johnson S M (2000) The affect heuristic in

judgments of risks and benefits Journal of Behavioral Decision Making 13(1) 1-17

Forgas JP amp George JM (2001) Affective influences on judgments and behavior in

organizations An information processing perspective Organizational Behavior and

Human Decision Processes 86(1) 3-34

Grandey AA (2000) Emotion Regulation in the Workplace A new way to conceptualize

Emotional Labor Journal of Occupational Health Psychology 5(1) 95-110

33

Grandey A A (2003) When the show must go on surface acting and deep acting as

determinants of emotional exhaustion and peer-rated service delivery Academy of

Management Journal 46 86-96

Gray JA (1999) Cognition emotion conscious experience and the brain In T Dalgleish and

MJ Power (Eds) Handbook of Cognition and Emotion (pp83-102) Chichester England

Wiley

Gross J (2002) Emotion regulation affective cognitive and social consequences

Psychophysiology 39 281

Gross J J amp John O P (2003) Individual differences in two emotion regulation processes

Implications for affect relationships and well-being Journal of Personality and Social

Psychology 85(2) 348-362

Gross J J amp Thompson R A (2007) Emotion regulation Conceptual foundations In J J

Gross (Ed) Handbook of emotion regulation New York NY Guilford Press

Isen A M Shalker T E Clark M amp Karp L (1978) Affect accessibility of material in

memory and behavior A cognitive loop Journal of Personality and Social Psychology

36 1-12

Johnson E amp Tversky A (1983) Affect generalization and the perception of risk Journal of

Personality and Social Psychology 45(1) 20-31

Kavanaugh D amp Bower G (1985) Mood and self-efficacy Impact of job and sadness on

perceived capabilities Cognitive Therapy and Research 9 507-525

Klein G A Calderwood R amp Clinton Cirocco A (1986) Rapid decision-making on the

fireground Human Factors and Ergonomics Society 30th Annual Meeting Vol 1 576-

580

Knorr-Cetina K amp Brugger U (2002) Traders Engagement with Markets A Postsocial

Relationship Theory Culture and Society 19(5-6) 161-185

Labouvie-Vief G (2003) Dynamic integration Affect cognition and the self in adulthood

Current Directions in Psychological Science 12 201-206

Lerner J S amp Keltner D (2001) Fear anger and risk Journal of Personality and Social

Psychology 81(1) 146-159

Lerner J S Small D A amp Loewenstein G (2004) Heart strings and purse strings Carryover

effects of emotions on economic decisions Psychological Science 15(5) 337-341

Lo A Repin D amp Steenbarger B (2005) Fear and greed in financial markets A clinical study

of day traders American Economic Review 95 352-359

Lo A W amp Repin D V (2002) The Psychophysiology of Real-Time Financial Risk

Processing Journal of Cognitive Neuroscience 14 323-339

MacKenzie D (2006) An Engine Not A Camera How Financial Models Shape Markets

Cambridge Mass MIT Press

Mayer JD amp Hanson A (1995) Mood-congruent judgment over time Personality and Social

Psychology Bulletin 21 237-244

Mayer JD DiPaolo M and Salovey P (1990) Perceiving affective content in ambiguous

visual stimuli a component of emotional intelligence Journal of Personality Assessment

54 772-781

Miller G (2003) The cognitive revolution a historical perspective Trends in Cognitive Science

7 141

Muraven M amp Baumeister R F (2000) Self-regulation and depletion of limited resources

Does self-control resemble a muscle Psychological Bulletin 126 247-259

Nicholson N (2000) Managing the Human Animal London ThomsonTexere

34

Peterson R L (2007) Affect and financial decision-making How neuroscience can inform

market participants The Journal of Behavioral Finance 8(2) 70-78

Pham M T (2004) The logic of feeling Journal of Consumer Psychology 14 360-369

Phelps E A (2006) Emotion and cognition Insights from studies of the human amygdala

Annual Review of Psychology 57 27-53

Sayer A (1997) Essentialism social constructionism and beyond The Sociological Review 45

453-487

Shapira Z amp Venezia I (2001) Patterns of behavior of professionally managed and

independent investors Journal of Banking and Finance 25 1573ndash1587

Schunk D amp Betsch C (2006) Explaining the heterogeneity in utility functions by individual

differences in decision modes Journal of Economic Psychology 27 386-401

Schwager J D (1993) Market Wizards Interviews with Top Traders New York Collins

Schwarz N amp Clore G L (1983) Mood misattribution and judgments of well-being

Informative and directive functions of affective states Journal of Personality and Social

Psychology 45 513-523

Seo M G Barrett L F amp Bartunek J M (2004) The role of affective experience in work

motivation Academy of Management Review 29 423-439

Seo M G amp Barrett L F (2007) Being emotional during decision makingmdashgood or bad An

empirical investigation The Academy of Management Journal 50 923-940

Shefrin H (2000) Beyond Greed and Fear Understanding Behavioral Finance and the

Psychology of Investing Boston MA Harvard Business School Press

Stokes A F Kemper K amp Kite K (1997) Aeronautical decision making cue recognition and

expertise under time pressure In C E Zsambok amp G Klein (Eds) Naturalistic Decision

Making pp 183-196 Mahwah NJ Erlbaum

Tamir M (2005) Dont worry be happy Neuroticism trait-consistent affect regulation

and performance Journal of Personality and Social Psychology 89 (3) 449 ndash

461

Thaler R H (1985) Mental accounting and consumer choice Marketing Science 4(3) 199-214

Thaler R H (1993) Advances In Behavioral Finance New York Russel Sage Foundation

Thaler R H (1999) Mental accounting matters Journal of Behavioral Decision Making 12(3)

183-206

Tiedens L amp Linton S (2001) Judgment under emotional certainty and uncertainty the effects

of specific emotions on information processing Journal of Personality and Social

Psychology 81(6) 973-988

Todd P M amp Gigerenzer G (2007) Environments that make us smart Ecological rationality

Current Directions in Psychological Science 16 167-171

Totterdell P Briner R B Parkinson B amp Reynolds S (1996) Fingerprinting time series

dynamic patterns in self-report and performance measures uncovered by a graphical non-

linear method British Journal of Psychology 87(1) 43-60

Weber M amp Welfens F (2008) Splitting the Disposition Effect Asymmetric Reactions

Towards bdquoSelling winners‟ and bdquoHolding Losers‟ Working Paper University of

Mannheim

Wright WF amp Bower GH (1992) Mood effects on subjective probability assessment

Organizational Behavior and Human Decision Processes 52 276ndash91

7

effects on risk perceptions (Lerner amp Keltner 2001 Lerner et al 2004) Additionally emotions

bias the value attached to outcomes For example intense negative emotions enhance valuation of

short-term outcomes regardless of negative long term consequences (Gray 1999) Overall

positive affect tends to be associated with optimistic decision making and negative affect with

pessimistic choices (Isen et al 1978 Johnson amp Tversky 1983 Kavanagh amp Bower 1985

Mayer amp Hanson 1995 Schwarz amp Clore 1983 Wright amp Bower 1992)

Emotions also have a role in risk-related decision making A laboratory study of financial

decision-making under risk found that low levels of emotional experience led to higher levels of

performance through greater risk neutrality due to a more constant association between objective

gain and subjective value (Schunk amp Betsch 2006) Lo et al (2005) found clear associations

between day-traderslsquo emotions their decision making and performance There was evidence that

positive decision-making outcomes as assessed by profits and losses were associated positively

with pleasant affect (eg content) and negative outcomes with unpleasant affect (eg bored)

Furthermore investors who experienced more intense positive and negative emotional reactions

to gain and loss were poorer performers than those with more attenuated emotional responses

The authors suggested that rapid emotional decision making is unsuited to the complex

information-rich environment of trading The trading practitioner literature also tends to promote

the view that emotions are detrimental to decision making exemplified in the following quotation

from highly rated trader Bruce Kovner ―Whenever a trader says bdquoI wish‟ or bdquoI hope‟ he is

engaging in a destructive way of thinking because it takes away from the diagnostic thought

process (Schwager 1993 82) In contrast Seo and Barrett (2007) carried out a study of

investment club members using an internet-based investment simulation accompanied by

emotional-state surveys They found that individuals who experienced more intense emotions

achieved higher decision-making performance

8

Thus while there is ample evidence that emotions affect decision-making performance

including for traders the evidence on the nature of that impact is mixed While there is evidence

for the biasing effect of emotions there is also evidence that we rely on emotional cues in rapid

automatic decision-making and they confer a tangible advantage to everyday decision-making

(Bechara et al 1997)

Research into the nature of expertise has tended to characterize intuition (a form of

experientially-based pattern recognition linked to the affectively cued system 1 (Dane and Pratt

2007)) as integral to expert performance ndasheg Dreyfus amp Dreyfus 2005 Klein et al 1986

Stokes et al 1997) Dane and Pratt (2007) note an important distinction between on the one

hand the decision heuristics literature which mainly supports a view of intuitive decision-

making as inferior to more rational models and on the other the literature on expertise which

emphasizes the central role of intuition in expert performance A crucial difference between these

literatures is the different emphasis placed on research method and context Research on decision

heuristics is often context free and relies heavily on experiments using subjects who are

inexperienced in the tasks studied There is also evidence that some of the key cognitive biases

identified as maladaptive products of heuristic reasoning in experimental settings either do not

occur or lead to better outcomes when decision-making is studied in the field or studied using

approaches that approximate real life contexts (Todd amp Gigerenzer 2007) The expertise

literature in contrast places great emphasis on domain specific knowledge and skills on the

development of complex cognitive schema that enable rapid associative pattern recognition and

on the activation of extensive and complex behavioral repertoires Dane and Pratt (2007) argue

that in consequence intuition will be more likely to function as an effective component of

decision-making in performance domains that require significant experience and complex domain

relevant schema a description which fits the world of financial trading

9

In summary the emotions literature gives considerable support to the idea that emotions

have multiple critical impacts on decision-making Some of these can be characterized as bias

with the potential to be detrimental to decision-making performance However it is also apparent

that there is an alternative position it is not emotions per se that are detrimental to decision-

making performance but rather that expertise and the regulation of emotions determine whether

emotions have positive or negative impacts on decision performance

Emotion Regulation

Accounts of emotions as bias focus primarily on the potential for emotions to have a

negative influence on performance By contrast accounts of emotions as information focus

primarily on the valuable role of emotions in encapsulating prior relevant experience In

principle these two perspectives may not incompatible and effective emotion regulation may

have a role in reducing the biasing effect of emotion while retaining sensitivity to the information

which emotions may carry It thus seems likely that the regulation of emotion may play an

important role in emotion performance effects Gross (2002 Gross amp Thompson 2007)

distinguishes a series of different stages in emotion episodes and five associated emotion

regulation strategies The model suggests that people both choose and modify situations

Situations require attention and appraisal which leads to an emotional response

Attempts to manage emotions may focus on any of the stages indicated in the above

model One approach to managing emotions is to select avoid or modify situations Other

approaches include focusing attention on emotionally salient elements of a situation and where

emotional responses might be difficult to cope with reframing situations to modify the emotional

response It is also possible to avoid emotional responses by refocusing attention elsewhere Each

of these strategies could lead to responses being modulated or suppressed Gross and Thompson

(2007 16) make clear that this model of emotions and their regulation is something of a

10

simplification However the model usefully illustrates the central role of emotion regulation in

decision-making

In addition to theoretical modeling there is empirical evidence for a relationship between

strategies for emotion regulation and a range of important outcomes Recent research has paid

particular attention to the difference in outcomes between antecedent-focused emotion regulation

strategies which seek to change emotions before emotion responses have become fully activated

and response-focused regulation strategies which modify behavior and emotion expression once

the emotion response is underway Emotion regulation strategies have been shown to have

differential effects on outcomes including cognitive performance health and qualities of social

interaction (Gross and Thompson 2007) In the domain of work performance much attention has

focused on the emotional labor required by customer service interactions Here emotion

regulation has been characterized as a process of deep and surface acting Surface acting is the

faking of emotion display to accord with organization display rules Deep acting involves

modifying inner feelings Grandey (2000) considers emotional labor as a subset of emotion

regulation and equates antecedent-focused and response-focused regulation with deep and surface

acting respectively In a study of front-line service workers Grandey (2003) found antecedent-

focused emotion regulation was associated with greater effectiveness in relating to customers in a

warm friendly manner while response-focused emotion regulation was associated with emotional

exhaustion and greater tendency to break character and reveal negative emotions in a service

encounter This result supports Grosslsquos earlier work (2002) There is also some evidence on

emotion regulation and financial decision-making Seo and Barret (2007) found that investors

who were better able to identify and discriminate among their current feelings achieved superior

decision-making performance They argued that this relationship was mediated by effective

regulation of the influence of feelings on their decision-making

11

In the present study we go beyond the study of emotion regulation in a context of work

performance that depends primarily on social interaction In contrast to emotional labor studies

which focus on the context of interpersonal interaction most trading nowadays (and in all cases

we studied) is conducted electronically via computer or through highly abbreviated and

formalized electronic messages with counterparties Rather than depending on appropriate

emotion display in the context of customer interaction or negotiating with counterparties trader

performance depends on selecting optimal trading strategies in the face of complex cognitive

demands and the need to process significant amounts of information with uncertain relevance

(Knorr-Cetina amp Bruegger 2002) We now turn to the present study

THE STUDY AND METHODS

The data reported in this paper were collected as part of a large multifaceted study of the

role and behavior of traders working in investment banks For this paper we have returned to this

data corpus to examine the considerable amount that traders told us about their work and

emotion an aspect touched on only superficially in previous analysis of this data (see Fenton-

OCreevy Nicholson Soane and Willman 2005 for an extended account of the study)

Participants

Participants were sampled from four leading investment banks with offices in the City of

London Three banks were American and one was European Managers in each organization were

asked to select a representative sample of traders from a range of markets trading in stocks

bonds and derivatives The mean age of participants was 3281 years (sd = 491) There was

variation in traderslsquo experience with overall tenure (including time with previous employers) in a

range from 6 months to 30 years and a mean job tenure of 780 years (sd = 558) The trader

sample comprised 116 men (983) and 2 women (17) The participants were traders in

equities bonds and derivatives most engaged in either market making or proprietary trading or

12

both We gathered information on individual trader characteristics and performance and carried

out semi-structured interviews with each trader and with a further 10 senior managers Where

traders were also managers we interviewed them twice once as a trader and once as a manager

Data

Qualitative data Interviews lasted between 30 and 90 minutes They were recorded and

transcribed in full The interviews ranged over multiple aspects of the traderslsquo roles and work

The data set for this study consisted of the portions of the interviews relevant to the role of

feelings in traderslsquo work and decision making Traders were asked to describe the range of

emotions they experienced during trading Follow-up questions encouraged them to explore the

long-term and short-term effects of emotions on their decision making and trading strategy the

role of intuition in their trading and the impact of emotions on performance Managers were

asked to describe how they evaluated and managed trader performance Again this often

produced talk about traderslsquo feelings and how they were managed

Performance data Hard performance data for traders are difficult to obtain Measures

such as value at risk trading outcomes and profit and loss are highly confidential in this setting

and were not available to us so we used total remuneration as our measure of trader performance

We felt this to be a reasonable proxy for decision-performance since a high proportion of total

remuneration is a variable annual performance linked bonus and the non-bonus elements tend to

reflect longer term financial performance in this very performance oriented sector We have

treated this variable as an indicator of expertise which Ericsson (2006) defines as reliably

superior performancelsquo Traders were asked to state their income including bonus in terms of

four categories (1 pound50000 - pound99999 (N = 4) 2 pound100000 to pound299999 (N = 41) 3 pound300000-

pound499999 (N = 34) 4 more than pound500000(N = 38) One trader declined to provide this

information

13

Analysis

The raw data were the full transcripts of all interviews We used a thematic analysis

approach which we judged to be particularly well suited to the present study As Braun and

Clarke (2006 78) note thematic analysis does not rest on a single epistemic position but can

span both realist and constructivist approaches We take the position that emotions have both a

measurable biological reality and exist in the realm of socially constructed personal experience in

which emotions have personal and social meaning

Data were open-coded by each author separately then in discussion using the NVIVO

program Common statements were identified and used as the basis for a first set of coding

categories which were subsequently refined and consolidated Coding categories were thus both

emergent from the interviews and drew on constructs identified in the literature (eg approaches

to emotion regulation) relevant to emerging themes Thus coding was both theoretical and

inductive As we analyzed the data and drew tentative conclusions we explicitly sought

disconfirming evidence to test the robustness of our insights In a later stage of analysis we

partitioned the sample into groups of low (lt5 years n=25) medium (5 to 10 years n=48) and

high experience (gt10 years N=45) and into groups of low (remunerationlt pound300k N=45) medium

(pound300k- pound500k N=34) and high expertise (gt pound500k N=38) We compare interview responses of

three specific groups inexperienced low paid traders (N=18) highly experienced but low paid

traders (N=15) and high paid traders (N=38) The remainder of the sample were medium

experience and pay There were no low experience high pay traders We chose the three

comparison groups to provide maximal contrast in differentiating the characteristics associated

with different levels of experience and expertise respectively

14

In Table 1 we summarize our key findings and the nature of the evidence for each finding

In the final column we note our sense of the strength of the evidence for each finding This

represents a qualitative conclusion arrived at though discussion between the authors and drawing

on quantity consistency importance and clarity of supporting data and existence of any

disconfirming evidence In the next section of the paper we discuss these findings and the

evidence for them in more detail Direct quotes are verbatim accompanied by the case number of

the respondent and their classification in terms of experience and pay level

TABLE 1 ABOUT HERE

TRADERSrsquo UNDERSTANDINGS OF EMOTION IN THEIR TRADING PRACTICE

Emotional experience and regulation

For many traders especially the less experienced trading is marked by significant and

persistent emotional responses to successes and setbacks It is relevant to note the distinction

between mood and emotion since both were relevant to traders Mood can be understood as a

relatively diffuse emotional climate which persists over time and not anchored to specific

situations or cognitions In contrast emotions typically have specific objects and give rise to

behavioral response tendencies relevant to those objects (Totterdell Briner et al 1996)

ldquoWhen you lose money you could sit down and cry Anybody who says you couldn‟t

isn‟t being honest with you Of course when it‟s good it‟s fantastic The highs and

lows of a trader‟s life are euphoria or absolute dismayrdquo 106 high experience

medium pay

While these emotional responses would often be triggered by specific events or series of

events in many cases the impact on mood would persist for significant periods with

consequences for subsequent trading behavior For example one manager described a trader

15

working for him as ―having been in the wilderness his confidence totally shattered for about

two years before slowly recovering from a string of losses Many talked about needing weeks or

even months to recover from the impact of major losses especially early in their careers Others

talked about the dangers of false confidence or euphoria which could persist for some time after a

big win

ldquoPeople get a bit arrogant when they have good times but this can be dangerous

because then they stop thinking as muchrdquo 18 medium experience medium pay

ldquoI tend to feel more cautious when losing moneyhellipIf I am having a down month I‟ll

look at trades which I would do if I was having a good month and say I don‟t like it

enough to take the risk on it I become more selective more risk averse and to do a

trade I need to see more than one reason why a trade will work and then might put it

on but not in a huge size When making money I can be more slack 29 high

experience high pay

However our data also suggest emotion regulation is critical to moderating the impact of

emotions on traderslsquo decision making Senior traders and trader managers frequently talked about

the way in which they had developed a capacity to regulate their own emotions and trade more

evenly regardless of success and setbacks

ldquoYou learn to be able to deal with emotions It doesn‟t get to me as much There

were situations when I was extremely stressed up and then you feel physically ill and

you really feel on the verge of throwing up But that was a long time ago and doesn‟t

happen so much now You have seen the ups and downs more You have experienced

them and in a way you are probably more prepared for it and you are aware that

every now and then it will happenhellip but it doesn‟t get to you all that much because

you are aware that it will happen 6 medium experience high pay

16

We examined emotion regulation and its relevance to performance further by considering

data from the three comparison groups (based on experience and pay) We noticed some

important differences in the way in which these groups discussed the interaction between

emotion trading and the use of intuition First there seemed to be notable differences in the

strategies employed for emotion regulation which we describe below in the language of the

Gross and Thompson model (2007) When asked directly about emotion traders in the low

experience group typically started by presenting themselves as fairly immune to the impact of

emotion on their trading However as the interview progressed they would often reveal rather

more vulnerability to emotions than they had claimed initially Take for example this trader who

had been trading for a little less than 4 years -

ldquoI‟m bit of a cold fish I don‟t think emotions greatly affect my decision-making If

you are making money you are achieving your objectivehellip

[But later]

hellipWhen you lose money it can be horrendous violent mood swings You don‟t know

what to do when you lose moneyrdquo 38 low experience low pay

There tended to be two responses types when these traders did talk about their emotions

Some in the low experience low pay group did not talk at all about actively managing their

emotions Others talked about removing themselves from situations when their emotions became

a problem (situation modification) or avoiding situations entirely which make them feel bad

(situation selection)

ldquoI think there is a strong emotional element to trading I think that anyone who‟s

doing it properly and has got their head screwed on is doing everything they can

consciously to overrule that and if I feel that I‟m trading emotionally I will walk off

17

the desk have a glass of water walk up and down the street and then come back and

make decisions when I‟m hopefully not emotionalrdquo 43 low experience low pay

Traders in the experienced group more commonly talked about strategies for emotion

regulation However the nature of these strategies tended to vary between the low paid and high

paid groups In the high experience low paid group traders seemed to find it hard to articulate

how they managed their emotions and the emotion regulation strategies they identified were

predominately situation avoidance situation modification and response modulation

ldquoIf you get two or three decisions wrong you find you might not take a risk for a

month until you build up your confidence There‟s definitely a lot of confidence

involvedrdquo 104 high experience low pay

ldquoI try and keep my emotions under tight controlrdquo 105 high experience low pay

There is a marked contrast in the discourse of the high performing traders who often

showed a greater willingness to reflect on their emotion-driven behavior (the two exceptions to

this were traders with whom we had only short interviews with little opportunity for extended

reflection rather than any denial of the role of emotion) Emotion regulation for these traders

tended to focus mainly on how they directed their attention (attentional deployment) and how

they framed experiences of loss and gain (cognitive change)

ldquoBig losses and big gains can swap around fairly quickly and once you understand

that then you stop concentrating on the loss and you start concentrating more on how

to make money back hellip One big trade is not going to make anyone and one big loss

doesn‟t destroy yourdquo 15 high experience high pay

ldquoExperience definitely helps having traded through the crash etc Youve seen

different scenarios and newer people its like oh my god its the end of the world

whereas there is life after death and so I think that type of experience helps It doesnt

18

necessarily help the new situation on what to do but it just helps your judgmentrdquo 55

high experience high pay

There was a notable absence of avoidant behavior in this group Several participants told

stories which implied a significant degree of persistence in the face of negative emotion

ldquoI had one very bad year from which I learned quite a lot I learned that the

overshooting can go on for a very long time it can be very painful you can hit risk

limits hellip I did not want to get out of the trades so kept the trades and then next year

they made more money than they lost I don‟t think I panicked but I was getting calls

from the CEO Reason prevailed in the end Emotionally it was not easy to cope

with There were times when the desk was down close to $100m I lost almost that

much in days I was under a lot of pressure from New York because they did not

understand my positions but in the end we managed to keep the positions and made

money the next year The hardest thing was persuading others that I had a good

traderdquo 14 high experience high pay

This willingness among some of the high performing traders to experience negative

emotion in order to achieve longer term goals is consistent with Labouvie-Vieflsquos (2003)

argument that positive self-development requires not just strategies to optimize positive affect

but also the ability to tolerate tension and negativity to achieve long term goals

However there may be another important reason why response modulation strategies are

maladaptive for traders As we have seen above while poorly regulated emotions carry over to

subsequent trading and risk biasing subsequent trading behavior emotion cues generated by

reactions to information relevant to current trading under time constraints play an important role

in guiding attention and rapidly choosing appropriate action Both poor regulation of non-

19

relevant emotions and recourse to the attempted suppression of all feeling run the risk of masking

these important cues

The Role of Managers in Emotion Regulation

Further evidence of the importance of emotions and their regulation to trader performance

came from interviews with trader managers A few managers described their role in primarily

technical terms focusing on risk management and personal supervision of problematic trades

However many of those we interviewed clearly saw regulating the emotions of traders who

worked for them as a key element in managing trader performance

ldquoI have to play the role of director of emotions in the sense that when they are down

you have to boost their morale and when they are too excited they want to do stupid

things I have to cool them downrdquo 119 senior manager

ldquoI care deeply because I have tremendous pride in the people herehellipThe stress is

generated by fear entirely and it‟s fear of what I guess everyone has their

insecurities whether it‟s being fired losing lots of money and appearing stupid in

front of their peer group Whatever it is it‟s definitely fear and if you can take the

fear out of the situation they perform betterrdquo 123 senior trader manager high

experience high pay

Many traders described such episodes of managerial intervention as crucial to their

learning and development For example-

ldquoI lost $1m in the first 10 days of the year This was at a time when if you made $1m

in a year that was huge I was devastated and my boss asked me for lunch at the

weekend - I thought that was the end of my career My boss said bdquoa lot of the guys

think you‟re OK but they are worried you are going to be afraid to trade that you‟re

20

going to be gun shy and lose your confidence We want you to know that we like you

and if you think you‟ve got to buy them buy them and if you‟ve got to sell them sell

them but whatever you do don‟t stop trading‟ So that was a huge relief Since then I

don‟t get too depressed about losing money although there are always good days

and bad daysrdquo 25 low experience medium performance

Other managers clearly gave thought to the relative strengths and weaknesses of more

intuitive versus more analytical traders in their decisions about matching traders to roles -

ldquoA gut trader should trade a liquid market - he might change his feel so he needs to

get out The analytical trader who thinks much more about what he‟s doing will

change their mind less often and trade with a different time frame A gut trader can

be bullish in the morning The analytical trader will look at something for a week

and then put on a position - less important to get in and out He doesn‟t need to be in

a liquid market - in an emerging market you need a more analytical traderrdquo 122

Manager

ldquoDerivatives are very quantitative and people think if you have a PhD you will be

very good because you have an understanding of options theory but this is not

always the case and you tend to overlook things Although you can put the

parameters into the model there are still a lot of things which are uncertain

Sometimes adding a more qualitative feel to it ndashbdquoyes that‟s what the model says but

the risk doesn‟t look right‟ hellip I tend to have a mixture of people on the desk - those

who are more quantitative and those who are more common sense or gut instinct

traders Having the blend is quite useful for bouncing ideasrdquo 124 Manager

These reflections have implications for management strategies in trading environments or

indeed any others where the main role of the operative is complex decision-making under

21

constraints of time and uncertain and incomplete information We consider these points further in

our discussion

Emotional Cues and the Use of Intuition

The second broad theme concerned the role of emotional cues in traderslsquo decision-

making Many of the traders discussed this aspect of emotion as intuition Traderslsquo own accounts

and conceptualizations of intuition fit well with Dane and Prattlsquos (200740) definition of intuition

as ―affectively charged judgments that arise through rapid non-conscious and holistic

associations For example -

ldquo[W]ithout a doubt some of the best bargains are the ones you dont do You know

theyre bad bargains You know It‟s a gut feel Youve looked at the playing field and

you just know this is a bad bargainrdquo 106 high experience moderate pay

Some of the traders see a more subtle and sophisticated role for emotions which represent

an unconscious drawing on experience -

ldquoI think many people do say theyre gut-feel traders but perhaps theyre not analyzing

what theyre actually thinking and theyre seeing a lot of customer flow and a lot of

buyers and they probably dont necessarily realize the reasons why they want to buy

But there are very good traders that say theyre trading off gut feel that I believe

actually have probably reasonable information reasonable thoughts behind it but

they wouldnt literally toss a coinrdquo 55 high experience high pay

Feelings are also seen as a kind of radar directing attention and shaping perceptions

around opportunities to enable them to be promptly seized

ldquoI think what a trader has to have is not necessarily this gut feeling but this nose for

opportunities If an opportunity comes along you have to be able to spot it and see it

22

and sometimes people you typically find in this business - an opportunity is there and

they cant see it and then its taken by someone else and its like oh yeah that was a

good idea but it is gonerdquo 58 high experience low pay

Not only do feelings act as a kind of radar directing attention but they do so in a way that

enables rapid decision making under time pressure As one trader noted -

ldquoTrading includes stuff which is beyond trading Trading is when you make decisions

involving financial risk that have two qualities you have to make them in someone

else‟s time schedule not your own and when you make a decision you have to be

confident when you have incomplete or imperfect information and therefore there

must be some kind of intuitive or qualitative elementrdquo 121 high experience high pay

Experienced traders made much more reference to intuition or gut feellsquo as they often

phrased it than less experienced traders However again there were important differences

between low and high paid traders in the high experience group Low paid traders who talked

about the use of intuition often talked of it in terms of a rather mysterious process You either had

a feeling or not For example

ldquoIt‟s almost like a sixth sense Something comes over you and you feel like - yes I

know they‟re going to be looking to buy these later on or looking to sell these later

onrdquo 116 high experience low pay

By contrast the top paid group tended to reflect critically about the origins of their

intuitions and to bring them together with more objective information -

ldquoIf I do fancy a stock - you have a feeling it feels right it has done nothing for like

two or three months and you‟ve seen sellers and they start to dwindle and it is just

stagnant and then you have a look on the charts you refer to the technical side as

well as the emotional side of the trade So you know a combination of technical and

23

emotional as well as what the analyst thinks as well so you sort of bring the

instruments you have available to you to make the decision rather than the snap

[snaps his finger] I fancy buying thatrdquo 101 high experience high pay

ldquoI may examine opportunities based on intuition that something is going to happen

but the decision is based on something I think is rationalrdquo 68 medium experience

high pay

Reported use of intuition does seem to increase with trader experience However traderslsquo

engagement with their feelings is qualitatively different between low and high performers High

performing traders seem to engage with their intuitions at a meta-cognitive level and make

judgments about the relevance of these feelings to the decision at hand This is consistent with

the growing literature on expertise which points to experience as a necessary but insufficient

condition for the development of expertise and points to the role of extended critical engagement

with practice in developing expertise (Ericsson 2006 Ericsson Krampe amp Tesch-Roemer

1993)

Traders were not universally positive about the role of intuition in market decision making

Some believed reliance on such feelings yields poor outcomes -

ldquoMany traders feel that models have been developed by academics who do not know

markets and [traders] think that gut feeling is more important My experience is that

this is 100 wrong and computers can make better decisions than tradersrdquo 37

medium experience medium pay

Overall however the data support a picture of expert traders having a meta-cognitive

engagement with emotion regulation This process entails discrimination between emotions in

terms of their relevance to the decision at hand and effective strategies for emotion regulation to

enhance performance

24

Empathy

The third identified theme was empathy monitoring own emotions as information

about what other market players might be feeling Only five traders explicitly described

using their own capacity for empathy as a decision making tool Although not frequent in

our data these examples are important illustrating that there is a path for traders beyond

simply seeking to eliminate or reduce the intensity of their emotions These traders

fostered feelings as a source of information about other market actors which they managed

and used in a self-aware analysis One trader described using his own fear as an indicator

of fear in the market Another described actively imagining the feelings of other market

actors ―trying to put myself in [the Bank of England Governorlsquos] feet to develop a feel for

how he feels and thinks 14 high experience high pay

Three traders talked about an emotional affinity with the feelings of people in

national markets (Spain 34 high experience medium pay Italy 70 medium experience

low pay and Japan 117 high experience medium pay) with whom they shared a common

culture and propensity to react emotionally in similar ways to the same market events This

group was small but these data broaden the picture of traders reasoning with emotionlsquo

and offer a potentially rich and fruitful avenue for future research

DISCUSSION AND CONCLUSIONS

To ask whether emotion disturbs or aids traderslsquo decision-making is to ask the wrong

question Traderslsquo emotions and cognition are inextricably linked Therefore a more productive

question to ask in this context is whether there are more or less effective strategies for managing

and using emotion in financial decision-making This has been the thrust of our analysis which

25

sought to move beyond previous work that simply characterizes emotional arousal as detrimental

to performance (eg Lo et al 2005 Schunk and Bersh 2006) The study contributes to our

understanding of the role of emotions in work and decision-making in several distinct ways In

contributing to our understanding of the role of emotion at work this study has particular

relevance in that it considers a work domain which has been theorized as strongly normatively

rational as opposed to a work domain (such as negotiation or customer service) where

performance is primarily dependent on effective social interaction However it is clear from this

study that even within such an analysis-intensive domain as financial trading emotion plays a

central role Traders and their managers are frequently preoccupied with the effective regulation

and use of emotions in their work Our work points to the value of a more nuanced understanding

which considers the role of emotions in decision-making the differential impact of various

emotion regulation strategies the conditions under which gut-feellsquo may support effective

decision-making and the role of empathic responses in understanding the behavior of other

market actors

Effective emotion regulation seems to be a critical success factor in trading for our

findings suggest that the strategies for emotion regulation adopted by expert higher performing

traders are qualitatively different from those of lower performing traders In particular higher

performers are more inclined to regulate emotions through attentional deployment and cognitive

change and may display a willingness to cope with negative feelings in the interests of

maintaining objectivity and pursuing longer term goals The kind of attention and appraisal-

focused emotion regulation strategies used by high-performing traders do not seem to be too

cognitively expensive and are effective in reducing negative experience of emotion (Gross

2002) By contrast less expert traders engage either in avoidant behaviors such as walking

away from the desk or invest significant cognitive effort in modulating their emotional

26

responses This extends previous findings (eg Grandey 2003) concerning the performance

benefits of antecedent versus response-focused emotion regulation in the context of emotion

labor to the very different context of financial decision-making Our findings also suggest that

willingness to endure negative feelings in pursuit of long-term goals may be more adaptive than

purely defensive strategies aimed at maintaining positive feelings (Labouvie-Vief 2003 Tamir

2005)

This study also provides evidence that more effective emotion regulation strategies can be

learned in a financial decision-making context While an individuallsquos preferred approach to

emotion regulation is likely to be influenced by personality traits neuroticism and extroversion in

particular (Gross amp John 2003) our interviews with traders and their managers also point to the

importance of traderslsquo learned strategies for emotion regulation Importantly our study also

suggests that defensive emotion regulation strategies may be problematic because they reduce

opportunities to exercise expert intuition

These findings go well beyond prior research on emotion regulation and performance

(eg Grandey 2003) which has a primary focus on performance in the context of interpersonal

interaction Our findings uniquely address the performance of professional traders for whom

performance is not primarily dependent on interpersonal interaction and which has been

theorized as strongly rational involving the selection of optimal strategies in the face of complex

cognitive demands and requiring attention to a large volume of information with uncertain

relevance

Turning to intuition traders in our study mirror the balance of opinion in the research

literature on intuition They are equivocal about whether feelings and hunches about appropriate

courses of action lead to better or worse outcomes than purely rational analysis There were

strong feelings on both sides with traders being quite evenly divided between the two camps

27

However again our study suggests the importance of a more nuanced approach than simply

asking whether reliance on intuition is good or bad and points towards the conditions in which

reliance on intuitive judgment may be more and less effective The findings suggest that one

characteristic of higher performing traders may be a greater willingness to reflect critically about

their intuitions and feelings about trading These traders often reported relying on intuition but

they tend to weigh their feelings critically alongside other evidence and to reflect about the

provenance of those feelings Lower performing traders may rely on feelings alone and show

less propensity to think critically about the source of hunches This reflection by expert traders

about the provenance of feelings may be particularly salient given Schwarz and Clorelsquos (1983

2003) finding that the impact of emotions on behavior is reduced or disappears when the

relevance of those emotions is explicitly called into question

That traderslsquo reliance on affective cues in decision-making can support effective

performance is consistent with Damasiolsquos observation that deciding advantageously depends on

the use of affective cues in both learning and deciding (Bechara et al 1997 Damasio 1994)

There is increasing evidence that humans are naturally proficient in the ability to acquire

expertise and that encapsulation of experience in expert intuition and perception via system one

provides a means of by-passing cognitive limits (Ericsson 2006) The nature of expertise could

counteract the inherent environmental uncertainties that Tiedens and Linton (2001) identified as

leading to more conscious appraisal of information While not an unequivocal result our finding

of greater critical engagement among higher performing traders with intuitions and their more

sophisticated deployment of intuition in combination with analysis suggests an important

direction for future research

The small number of accounts of traders monitoring their own emotions as a source of

information about the emotions of other market actors was intriguing These data suggest a

28

possibly productive avenue for future research We do not have evidence of performance

outcomes of predictive uses of empathy in this manner but our findings are consistent with

arguments that the evolution of the human brain has been significantly driven by the need to

predict the behavior of other humans often via subtle cues (eg Nicholson 2000)

We suggest that the identification of links between decision-making performance and

emotion regulation in this study has important implications for theory development in two key

fields First while somewhat tacit in much of the literature the implication of many claims in the

decision-making and behavioral finance literatures is that a range of key decision-making biases

are underpinned by mechanisms which involve emotion processes One relevant explicit example

is Thalerlsquos (1985 1999) account of the role of hedonic editinglsquo in mental accounting and the

disposition effect (the tendency to hold losing assets longer than winning assets) This explains

key biases in terms of the desire to maintain positive hedonic tone There is evidence too of

interpersonal variation in propensity to exhibit such biases for example investors vary in their

propensity to exhibit the disposition effect (Shapira amp Venezia 2001 Weber amp Welfens 2008)

In this study we have seen that traders seek to regulate emotions in order to avoid decision biases

and that higher performing traders typically exhibit more sophisticated emotion regulation

strategies This suggests that it would be productive to investigate the role of emotion regulation

as one key source of interpersonal variation in susceptibility to a range of decision biases

A second implication concerns the role of emotion in expert performance While much

attention has been paid to the nature of cognition in expert performance the expertise literature

hardly considers the role of emotion For example examining the index of the Cambridge

Handbook of Expertise and Expert Performance (Ericsson et al 2006) reveals very few

references to emotion and these are peripheral to the main arguments of the chapters which

contain them Our research suggests first that effective emotion regulation may be an important

29

facet of expert performance and second that greater attention should be paid to the interactions

between emotion emotion regulation and expert intuition Further research could test the

proposition that effective expert intuition is reduced by reliance on defensive emotion regulation

strategies

While our study points to the importance of intuition in traderslsquo work it may be that the

relative importance of intuition and analysis vary with task characteristics such as time span of

decision-making Certainly this seemed to be the view of several senior managers with

responsibility for allocating traders to trading roles The interplay that expert traders described

between intuition and analysis is also intriguing The importance of context to the role of affect

in decision-making has been noted in prior research (Forgas amp George 2001) Further research

could usefully explore this aspect of traderslsquo expertise

This study also contains some potentially important implications for practice First it

points to the importance of learned strategies for emotion regulation and the need for effective

support for their development Second our data directly and indirectly point to the key role of

management in this process Our findings suggest that there may be considerable benefits to

skilled managerial interventions that help to steer effective emotion regulation and support

inexperienced traders in developing emotion regulation skills Additionally managers may be

able to help traders to understand the productive role that critically engaged experience-based

intuition may play in decision-making Our evidence suggests that many high performing traders

deploy a reflective and critical approach to the use and development of intuition well-founded in

experience Managers could help to guide this process through coaching The contextual

dependence of high quality intuitions suggests they are quite domain specific and may not

transfer across contexts As several informants told us this is especially true for traders operating

under different market conditions

30

We heard repeated concerns from senior managers who worried about traders who had

not seen a bear market and would not operate well when that occurred We also heard many

stories of people transferring between trading areas and needing time to re-contextualize

expertise before their intuitions could be considered reliable Thus managers have a role in

helping traders to extend the boundaries of their expertise Given recent events in financial

markets our findings may be relevant to an understanding of how traders react under massively

changed trading conditions and how those reactions might either contribute to or result from

market volatility

This research has some important limitations First although we have argued for the

importance of an account of emotion that includes the experience of emotion as Pham (2004

368) notes the affective system is focused on the present Thus people can be poor at recalling or

predicting emotions There are limits to the human capacity to introspect on emotion processes

and to recall the experience of emotion These limits are also subject to wide individual

differences The capacity for introspection and recall will also vary between individuals For this

reason studies such as ours need to be complemented with more physiologically based research

as well as further qualitative and quantitative studies

Second as in all work contexts traders subscribe to norms of socially sanctioned

behavior and to common narratives about the nature of their work We have not treated emotional

labor as a primary component of traderslsquo work and performance The majority of work

interactions are carried out through highly abbreviated electronic exchanges which provide a poor

medium for the communication of emotion However there is a sense in which traders engage in

emotional labor since especially for novices there are social pressures to comply with display

rules which emphasize the avoidance of displays of strong emotion One common narrative

thread that ran though many traderslsquo accounts of their work was a representation of trading work

31

as principally concerned with rational analysis from which emotions are a dangerous distraction

This narrative seemed particularly strong in the accounts of less experienced traders Although as

we have seen the mask would often slip as they discussed their work Some traderslsquo accounts

were clearly colored by a desire to conform to this mode of self-presentation In consequence it is

possible that in our interviews and during data analysis we were at times unable to distinguish

effectively between defensive denial of emotion and effective regulation of emotion This would

be another avenue for future research

To conclude we know that emotions are a rich source of experience in everyday life but

at the same time in work contexts they can be a source of vulnerability a wayward influence over

judgment and a source of disturbance to process The more ―rational-economic such

environments are the more likely we are to hold such beliefs (Nicholson 2000) Our research

illustrates that this position is false or at best short-sighted In the hyper-rational world of

trading in financial markets we did find some evidence that emotions disturbed performance but

mostly among the inexperienced and un-reflective traders The best traders are able to regulate

emotions effectively and incorporate relevant emotions as information ndash signals or a kind of

radar that contain information about risks what is going on in the minds of others and the weight

and relevance to be accorded to onelsquos own past experience

32

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Bargh J A Chen M amp Burrows L (1996) Automaticity of social behavior Direct effects of

trait construct and stereotype activation on action Journal of Personality and Social

Psychology 71 230-244

Baumeister R F Bratslavsky E Muraven M amp Tice D M (1998) Ego depletion Is the

active self a limited resource Journal of Personality and Social Psychology 74 1252-

1265

Bechara A Damasio A Tranel D amp Damasio A R (1997) Deciding advantageously before

knowing the advantageous strategy Science 275 1293-1295

Bower G H (1981) Mood and memory American Psychologist 36 129 ndash 148

Bower G H (1991) Mood congruity of social judgments In J P Forgas (Ed) Emotion and

social judgments (pp 31ndash53) Oxford Pergamon Press

Braun V amp Clarke V (2006) Using thematic analysis in psychology Qualitative Research in

Psychology 3(2) 77-101

Buck R (1999) The biological affects a typology Psychological Reveiw 106 301-336

Damasio A R (1994) Descartes‟ error Emotion reason and the human brain New York

Putnam

Dane E amp Pratt M G (2007) Exploring intuition and its role in managerial decision making

The Academy of Management Review 32 33-54

De Bondt W Palm F amp Wolff C (2004) Introduction to the special issue on behavioral

finance Journal of Empirical Finance 11 423-427

Dreyfus H amp Dreyfus S (2005) Expertise in real world contexts Organization Studies 26

779-792

Epstein S Pacini R Denes-Raj V amp Heier H (1996) Individual differences in intuitive-

experiential and analytical-rational thinking styles Journal of Personality and Social

Psychology 71 390-405

Ericsson K A Krampe R T amp Tesch-Roemer C (1993) The role of deliberate practice in the

acquisition of expert performance Psychological Review 100 363-406

Ericsson K A (2006) An introduction to the Cambridge Handbook of Expertise and Expert

Performance its development organization and content In K A Ericsson amp N Charness

amp P J Feltovich amp R R Hoffman (Eds) The Cambridge Handbook of Expertise and

Expert Performance 1st ed 3-20 Cambridge Cambridge University Press

Fama E F (1991) Efficient Capital Markets II The Journal of Finance 46 1575-1617

Fama E F (1998) Market efficiency long-term returns and behavioral finance Journal of

Financial Economics Vol 49 283-306

Fenton-OCreevy M Nicholson N Soane E amp Willman P (2005) Traders Risks Decisions

and Management in Financial Markets Oxford Oxford University Press

Finucane M L Alhakami A Slovic P amp Johnson S M (2000) The affect heuristic in

judgments of risks and benefits Journal of Behavioral Decision Making 13(1) 1-17

Forgas JP amp George JM (2001) Affective influences on judgments and behavior in

organizations An information processing perspective Organizational Behavior and

Human Decision Processes 86(1) 3-34

Grandey AA (2000) Emotion Regulation in the Workplace A new way to conceptualize

Emotional Labor Journal of Occupational Health Psychology 5(1) 95-110

33

Grandey A A (2003) When the show must go on surface acting and deep acting as

determinants of emotional exhaustion and peer-rated service delivery Academy of

Management Journal 46 86-96

Gray JA (1999) Cognition emotion conscious experience and the brain In T Dalgleish and

MJ Power (Eds) Handbook of Cognition and Emotion (pp83-102) Chichester England

Wiley

Gross J (2002) Emotion regulation affective cognitive and social consequences

Psychophysiology 39 281

Gross J J amp John O P (2003) Individual differences in two emotion regulation processes

Implications for affect relationships and well-being Journal of Personality and Social

Psychology 85(2) 348-362

Gross J J amp Thompson R A (2007) Emotion regulation Conceptual foundations In J J

Gross (Ed) Handbook of emotion regulation New York NY Guilford Press

Isen A M Shalker T E Clark M amp Karp L (1978) Affect accessibility of material in

memory and behavior A cognitive loop Journal of Personality and Social Psychology

36 1-12

Johnson E amp Tversky A (1983) Affect generalization and the perception of risk Journal of

Personality and Social Psychology 45(1) 20-31

Kavanaugh D amp Bower G (1985) Mood and self-efficacy Impact of job and sadness on

perceived capabilities Cognitive Therapy and Research 9 507-525

Klein G A Calderwood R amp Clinton Cirocco A (1986) Rapid decision-making on the

fireground Human Factors and Ergonomics Society 30th Annual Meeting Vol 1 576-

580

Knorr-Cetina K amp Brugger U (2002) Traders Engagement with Markets A Postsocial

Relationship Theory Culture and Society 19(5-6) 161-185

Labouvie-Vief G (2003) Dynamic integration Affect cognition and the self in adulthood

Current Directions in Psychological Science 12 201-206

Lerner J S amp Keltner D (2001) Fear anger and risk Journal of Personality and Social

Psychology 81(1) 146-159

Lerner J S Small D A amp Loewenstein G (2004) Heart strings and purse strings Carryover

effects of emotions on economic decisions Psychological Science 15(5) 337-341

Lo A Repin D amp Steenbarger B (2005) Fear and greed in financial markets A clinical study

of day traders American Economic Review 95 352-359

Lo A W amp Repin D V (2002) The Psychophysiology of Real-Time Financial Risk

Processing Journal of Cognitive Neuroscience 14 323-339

MacKenzie D (2006) An Engine Not A Camera How Financial Models Shape Markets

Cambridge Mass MIT Press

Mayer JD amp Hanson A (1995) Mood-congruent judgment over time Personality and Social

Psychology Bulletin 21 237-244

Mayer JD DiPaolo M and Salovey P (1990) Perceiving affective content in ambiguous

visual stimuli a component of emotional intelligence Journal of Personality Assessment

54 772-781

Miller G (2003) The cognitive revolution a historical perspective Trends in Cognitive Science

7 141

Muraven M amp Baumeister R F (2000) Self-regulation and depletion of limited resources

Does self-control resemble a muscle Psychological Bulletin 126 247-259

Nicholson N (2000) Managing the Human Animal London ThomsonTexere

34

Peterson R L (2007) Affect and financial decision-making How neuroscience can inform

market participants The Journal of Behavioral Finance 8(2) 70-78

Pham M T (2004) The logic of feeling Journal of Consumer Psychology 14 360-369

Phelps E A (2006) Emotion and cognition Insights from studies of the human amygdala

Annual Review of Psychology 57 27-53

Sayer A (1997) Essentialism social constructionism and beyond The Sociological Review 45

453-487

Shapira Z amp Venezia I (2001) Patterns of behavior of professionally managed and

independent investors Journal of Banking and Finance 25 1573ndash1587

Schunk D amp Betsch C (2006) Explaining the heterogeneity in utility functions by individual

differences in decision modes Journal of Economic Psychology 27 386-401

Schwager J D (1993) Market Wizards Interviews with Top Traders New York Collins

Schwarz N amp Clore G L (1983) Mood misattribution and judgments of well-being

Informative and directive functions of affective states Journal of Personality and Social

Psychology 45 513-523

Seo M G Barrett L F amp Bartunek J M (2004) The role of affective experience in work

motivation Academy of Management Review 29 423-439

Seo M G amp Barrett L F (2007) Being emotional during decision makingmdashgood or bad An

empirical investigation The Academy of Management Journal 50 923-940

Shefrin H (2000) Beyond Greed and Fear Understanding Behavioral Finance and the

Psychology of Investing Boston MA Harvard Business School Press

Stokes A F Kemper K amp Kite K (1997) Aeronautical decision making cue recognition and

expertise under time pressure In C E Zsambok amp G Klein (Eds) Naturalistic Decision

Making pp 183-196 Mahwah NJ Erlbaum

Tamir M (2005) Dont worry be happy Neuroticism trait-consistent affect regulation

and performance Journal of Personality and Social Psychology 89 (3) 449 ndash

461

Thaler R H (1985) Mental accounting and consumer choice Marketing Science 4(3) 199-214

Thaler R H (1993) Advances In Behavioral Finance New York Russel Sage Foundation

Thaler R H (1999) Mental accounting matters Journal of Behavioral Decision Making 12(3)

183-206

Tiedens L amp Linton S (2001) Judgment under emotional certainty and uncertainty the effects

of specific emotions on information processing Journal of Personality and Social

Psychology 81(6) 973-988

Todd P M amp Gigerenzer G (2007) Environments that make us smart Ecological rationality

Current Directions in Psychological Science 16 167-171

Totterdell P Briner R B Parkinson B amp Reynolds S (1996) Fingerprinting time series

dynamic patterns in self-report and performance measures uncovered by a graphical non-

linear method British Journal of Psychology 87(1) 43-60

Weber M amp Welfens F (2008) Splitting the Disposition Effect Asymmetric Reactions

Towards bdquoSelling winners‟ and bdquoHolding Losers‟ Working Paper University of

Mannheim

Wright WF amp Bower GH (1992) Mood effects on subjective probability assessment

Organizational Behavior and Human Decision Processes 52 276ndash91

8

Thus while there is ample evidence that emotions affect decision-making performance

including for traders the evidence on the nature of that impact is mixed While there is evidence

for the biasing effect of emotions there is also evidence that we rely on emotional cues in rapid

automatic decision-making and they confer a tangible advantage to everyday decision-making

(Bechara et al 1997)

Research into the nature of expertise has tended to characterize intuition (a form of

experientially-based pattern recognition linked to the affectively cued system 1 (Dane and Pratt

2007)) as integral to expert performance ndasheg Dreyfus amp Dreyfus 2005 Klein et al 1986

Stokes et al 1997) Dane and Pratt (2007) note an important distinction between on the one

hand the decision heuristics literature which mainly supports a view of intuitive decision-

making as inferior to more rational models and on the other the literature on expertise which

emphasizes the central role of intuition in expert performance A crucial difference between these

literatures is the different emphasis placed on research method and context Research on decision

heuristics is often context free and relies heavily on experiments using subjects who are

inexperienced in the tasks studied There is also evidence that some of the key cognitive biases

identified as maladaptive products of heuristic reasoning in experimental settings either do not

occur or lead to better outcomes when decision-making is studied in the field or studied using

approaches that approximate real life contexts (Todd amp Gigerenzer 2007) The expertise

literature in contrast places great emphasis on domain specific knowledge and skills on the

development of complex cognitive schema that enable rapid associative pattern recognition and

on the activation of extensive and complex behavioral repertoires Dane and Pratt (2007) argue

that in consequence intuition will be more likely to function as an effective component of

decision-making in performance domains that require significant experience and complex domain

relevant schema a description which fits the world of financial trading

9

In summary the emotions literature gives considerable support to the idea that emotions

have multiple critical impacts on decision-making Some of these can be characterized as bias

with the potential to be detrimental to decision-making performance However it is also apparent

that there is an alternative position it is not emotions per se that are detrimental to decision-

making performance but rather that expertise and the regulation of emotions determine whether

emotions have positive or negative impacts on decision performance

Emotion Regulation

Accounts of emotions as bias focus primarily on the potential for emotions to have a

negative influence on performance By contrast accounts of emotions as information focus

primarily on the valuable role of emotions in encapsulating prior relevant experience In

principle these two perspectives may not incompatible and effective emotion regulation may

have a role in reducing the biasing effect of emotion while retaining sensitivity to the information

which emotions may carry It thus seems likely that the regulation of emotion may play an

important role in emotion performance effects Gross (2002 Gross amp Thompson 2007)

distinguishes a series of different stages in emotion episodes and five associated emotion

regulation strategies The model suggests that people both choose and modify situations

Situations require attention and appraisal which leads to an emotional response

Attempts to manage emotions may focus on any of the stages indicated in the above

model One approach to managing emotions is to select avoid or modify situations Other

approaches include focusing attention on emotionally salient elements of a situation and where

emotional responses might be difficult to cope with reframing situations to modify the emotional

response It is also possible to avoid emotional responses by refocusing attention elsewhere Each

of these strategies could lead to responses being modulated or suppressed Gross and Thompson

(2007 16) make clear that this model of emotions and their regulation is something of a

10

simplification However the model usefully illustrates the central role of emotion regulation in

decision-making

In addition to theoretical modeling there is empirical evidence for a relationship between

strategies for emotion regulation and a range of important outcomes Recent research has paid

particular attention to the difference in outcomes between antecedent-focused emotion regulation

strategies which seek to change emotions before emotion responses have become fully activated

and response-focused regulation strategies which modify behavior and emotion expression once

the emotion response is underway Emotion regulation strategies have been shown to have

differential effects on outcomes including cognitive performance health and qualities of social

interaction (Gross and Thompson 2007) In the domain of work performance much attention has

focused on the emotional labor required by customer service interactions Here emotion

regulation has been characterized as a process of deep and surface acting Surface acting is the

faking of emotion display to accord with organization display rules Deep acting involves

modifying inner feelings Grandey (2000) considers emotional labor as a subset of emotion

regulation and equates antecedent-focused and response-focused regulation with deep and surface

acting respectively In a study of front-line service workers Grandey (2003) found antecedent-

focused emotion regulation was associated with greater effectiveness in relating to customers in a

warm friendly manner while response-focused emotion regulation was associated with emotional

exhaustion and greater tendency to break character and reveal negative emotions in a service

encounter This result supports Grosslsquos earlier work (2002) There is also some evidence on

emotion regulation and financial decision-making Seo and Barret (2007) found that investors

who were better able to identify and discriminate among their current feelings achieved superior

decision-making performance They argued that this relationship was mediated by effective

regulation of the influence of feelings on their decision-making

11

In the present study we go beyond the study of emotion regulation in a context of work

performance that depends primarily on social interaction In contrast to emotional labor studies

which focus on the context of interpersonal interaction most trading nowadays (and in all cases

we studied) is conducted electronically via computer or through highly abbreviated and

formalized electronic messages with counterparties Rather than depending on appropriate

emotion display in the context of customer interaction or negotiating with counterparties trader

performance depends on selecting optimal trading strategies in the face of complex cognitive

demands and the need to process significant amounts of information with uncertain relevance

(Knorr-Cetina amp Bruegger 2002) We now turn to the present study

THE STUDY AND METHODS

The data reported in this paper were collected as part of a large multifaceted study of the

role and behavior of traders working in investment banks For this paper we have returned to this

data corpus to examine the considerable amount that traders told us about their work and

emotion an aspect touched on only superficially in previous analysis of this data (see Fenton-

OCreevy Nicholson Soane and Willman 2005 for an extended account of the study)

Participants

Participants were sampled from four leading investment banks with offices in the City of

London Three banks were American and one was European Managers in each organization were

asked to select a representative sample of traders from a range of markets trading in stocks

bonds and derivatives The mean age of participants was 3281 years (sd = 491) There was

variation in traderslsquo experience with overall tenure (including time with previous employers) in a

range from 6 months to 30 years and a mean job tenure of 780 years (sd = 558) The trader

sample comprised 116 men (983) and 2 women (17) The participants were traders in

equities bonds and derivatives most engaged in either market making or proprietary trading or

12

both We gathered information on individual trader characteristics and performance and carried

out semi-structured interviews with each trader and with a further 10 senior managers Where

traders were also managers we interviewed them twice once as a trader and once as a manager

Data

Qualitative data Interviews lasted between 30 and 90 minutes They were recorded and

transcribed in full The interviews ranged over multiple aspects of the traderslsquo roles and work

The data set for this study consisted of the portions of the interviews relevant to the role of

feelings in traderslsquo work and decision making Traders were asked to describe the range of

emotions they experienced during trading Follow-up questions encouraged them to explore the

long-term and short-term effects of emotions on their decision making and trading strategy the

role of intuition in their trading and the impact of emotions on performance Managers were

asked to describe how they evaluated and managed trader performance Again this often

produced talk about traderslsquo feelings and how they were managed

Performance data Hard performance data for traders are difficult to obtain Measures

such as value at risk trading outcomes and profit and loss are highly confidential in this setting

and were not available to us so we used total remuneration as our measure of trader performance

We felt this to be a reasonable proxy for decision-performance since a high proportion of total

remuneration is a variable annual performance linked bonus and the non-bonus elements tend to

reflect longer term financial performance in this very performance oriented sector We have

treated this variable as an indicator of expertise which Ericsson (2006) defines as reliably

superior performancelsquo Traders were asked to state their income including bonus in terms of

four categories (1 pound50000 - pound99999 (N = 4) 2 pound100000 to pound299999 (N = 41) 3 pound300000-

pound499999 (N = 34) 4 more than pound500000(N = 38) One trader declined to provide this

information

13

Analysis

The raw data were the full transcripts of all interviews We used a thematic analysis

approach which we judged to be particularly well suited to the present study As Braun and

Clarke (2006 78) note thematic analysis does not rest on a single epistemic position but can

span both realist and constructivist approaches We take the position that emotions have both a

measurable biological reality and exist in the realm of socially constructed personal experience in

which emotions have personal and social meaning

Data were open-coded by each author separately then in discussion using the NVIVO

program Common statements were identified and used as the basis for a first set of coding

categories which were subsequently refined and consolidated Coding categories were thus both

emergent from the interviews and drew on constructs identified in the literature (eg approaches

to emotion regulation) relevant to emerging themes Thus coding was both theoretical and

inductive As we analyzed the data and drew tentative conclusions we explicitly sought

disconfirming evidence to test the robustness of our insights In a later stage of analysis we

partitioned the sample into groups of low (lt5 years n=25) medium (5 to 10 years n=48) and

high experience (gt10 years N=45) and into groups of low (remunerationlt pound300k N=45) medium

(pound300k- pound500k N=34) and high expertise (gt pound500k N=38) We compare interview responses of

three specific groups inexperienced low paid traders (N=18) highly experienced but low paid

traders (N=15) and high paid traders (N=38) The remainder of the sample were medium

experience and pay There were no low experience high pay traders We chose the three

comparison groups to provide maximal contrast in differentiating the characteristics associated

with different levels of experience and expertise respectively

14

In Table 1 we summarize our key findings and the nature of the evidence for each finding

In the final column we note our sense of the strength of the evidence for each finding This

represents a qualitative conclusion arrived at though discussion between the authors and drawing

on quantity consistency importance and clarity of supporting data and existence of any

disconfirming evidence In the next section of the paper we discuss these findings and the

evidence for them in more detail Direct quotes are verbatim accompanied by the case number of

the respondent and their classification in terms of experience and pay level

TABLE 1 ABOUT HERE

TRADERSrsquo UNDERSTANDINGS OF EMOTION IN THEIR TRADING PRACTICE

Emotional experience and regulation

For many traders especially the less experienced trading is marked by significant and

persistent emotional responses to successes and setbacks It is relevant to note the distinction

between mood and emotion since both were relevant to traders Mood can be understood as a

relatively diffuse emotional climate which persists over time and not anchored to specific

situations or cognitions In contrast emotions typically have specific objects and give rise to

behavioral response tendencies relevant to those objects (Totterdell Briner et al 1996)

ldquoWhen you lose money you could sit down and cry Anybody who says you couldn‟t

isn‟t being honest with you Of course when it‟s good it‟s fantastic The highs and

lows of a trader‟s life are euphoria or absolute dismayrdquo 106 high experience

medium pay

While these emotional responses would often be triggered by specific events or series of

events in many cases the impact on mood would persist for significant periods with

consequences for subsequent trading behavior For example one manager described a trader

15

working for him as ―having been in the wilderness his confidence totally shattered for about

two years before slowly recovering from a string of losses Many talked about needing weeks or

even months to recover from the impact of major losses especially early in their careers Others

talked about the dangers of false confidence or euphoria which could persist for some time after a

big win

ldquoPeople get a bit arrogant when they have good times but this can be dangerous

because then they stop thinking as muchrdquo 18 medium experience medium pay

ldquoI tend to feel more cautious when losing moneyhellipIf I am having a down month I‟ll

look at trades which I would do if I was having a good month and say I don‟t like it

enough to take the risk on it I become more selective more risk averse and to do a

trade I need to see more than one reason why a trade will work and then might put it

on but not in a huge size When making money I can be more slack 29 high

experience high pay

However our data also suggest emotion regulation is critical to moderating the impact of

emotions on traderslsquo decision making Senior traders and trader managers frequently talked about

the way in which they had developed a capacity to regulate their own emotions and trade more

evenly regardless of success and setbacks

ldquoYou learn to be able to deal with emotions It doesn‟t get to me as much There

were situations when I was extremely stressed up and then you feel physically ill and

you really feel on the verge of throwing up But that was a long time ago and doesn‟t

happen so much now You have seen the ups and downs more You have experienced

them and in a way you are probably more prepared for it and you are aware that

every now and then it will happenhellip but it doesn‟t get to you all that much because

you are aware that it will happen 6 medium experience high pay

16

We examined emotion regulation and its relevance to performance further by considering

data from the three comparison groups (based on experience and pay) We noticed some

important differences in the way in which these groups discussed the interaction between

emotion trading and the use of intuition First there seemed to be notable differences in the

strategies employed for emotion regulation which we describe below in the language of the

Gross and Thompson model (2007) When asked directly about emotion traders in the low

experience group typically started by presenting themselves as fairly immune to the impact of

emotion on their trading However as the interview progressed they would often reveal rather

more vulnerability to emotions than they had claimed initially Take for example this trader who

had been trading for a little less than 4 years -

ldquoI‟m bit of a cold fish I don‟t think emotions greatly affect my decision-making If

you are making money you are achieving your objectivehellip

[But later]

hellipWhen you lose money it can be horrendous violent mood swings You don‟t know

what to do when you lose moneyrdquo 38 low experience low pay

There tended to be two responses types when these traders did talk about their emotions

Some in the low experience low pay group did not talk at all about actively managing their

emotions Others talked about removing themselves from situations when their emotions became

a problem (situation modification) or avoiding situations entirely which make them feel bad

(situation selection)

ldquoI think there is a strong emotional element to trading I think that anyone who‟s

doing it properly and has got their head screwed on is doing everything they can

consciously to overrule that and if I feel that I‟m trading emotionally I will walk off

17

the desk have a glass of water walk up and down the street and then come back and

make decisions when I‟m hopefully not emotionalrdquo 43 low experience low pay

Traders in the experienced group more commonly talked about strategies for emotion

regulation However the nature of these strategies tended to vary between the low paid and high

paid groups In the high experience low paid group traders seemed to find it hard to articulate

how they managed their emotions and the emotion regulation strategies they identified were

predominately situation avoidance situation modification and response modulation

ldquoIf you get two or three decisions wrong you find you might not take a risk for a

month until you build up your confidence There‟s definitely a lot of confidence

involvedrdquo 104 high experience low pay

ldquoI try and keep my emotions under tight controlrdquo 105 high experience low pay

There is a marked contrast in the discourse of the high performing traders who often

showed a greater willingness to reflect on their emotion-driven behavior (the two exceptions to

this were traders with whom we had only short interviews with little opportunity for extended

reflection rather than any denial of the role of emotion) Emotion regulation for these traders

tended to focus mainly on how they directed their attention (attentional deployment) and how

they framed experiences of loss and gain (cognitive change)

ldquoBig losses and big gains can swap around fairly quickly and once you understand

that then you stop concentrating on the loss and you start concentrating more on how

to make money back hellip One big trade is not going to make anyone and one big loss

doesn‟t destroy yourdquo 15 high experience high pay

ldquoExperience definitely helps having traded through the crash etc Youve seen

different scenarios and newer people its like oh my god its the end of the world

whereas there is life after death and so I think that type of experience helps It doesnt

18

necessarily help the new situation on what to do but it just helps your judgmentrdquo 55

high experience high pay

There was a notable absence of avoidant behavior in this group Several participants told

stories which implied a significant degree of persistence in the face of negative emotion

ldquoI had one very bad year from which I learned quite a lot I learned that the

overshooting can go on for a very long time it can be very painful you can hit risk

limits hellip I did not want to get out of the trades so kept the trades and then next year

they made more money than they lost I don‟t think I panicked but I was getting calls

from the CEO Reason prevailed in the end Emotionally it was not easy to cope

with There were times when the desk was down close to $100m I lost almost that

much in days I was under a lot of pressure from New York because they did not

understand my positions but in the end we managed to keep the positions and made

money the next year The hardest thing was persuading others that I had a good

traderdquo 14 high experience high pay

This willingness among some of the high performing traders to experience negative

emotion in order to achieve longer term goals is consistent with Labouvie-Vieflsquos (2003)

argument that positive self-development requires not just strategies to optimize positive affect

but also the ability to tolerate tension and negativity to achieve long term goals

However there may be another important reason why response modulation strategies are

maladaptive for traders As we have seen above while poorly regulated emotions carry over to

subsequent trading and risk biasing subsequent trading behavior emotion cues generated by

reactions to information relevant to current trading under time constraints play an important role

in guiding attention and rapidly choosing appropriate action Both poor regulation of non-

19

relevant emotions and recourse to the attempted suppression of all feeling run the risk of masking

these important cues

The Role of Managers in Emotion Regulation

Further evidence of the importance of emotions and their regulation to trader performance

came from interviews with trader managers A few managers described their role in primarily

technical terms focusing on risk management and personal supervision of problematic trades

However many of those we interviewed clearly saw regulating the emotions of traders who

worked for them as a key element in managing trader performance

ldquoI have to play the role of director of emotions in the sense that when they are down

you have to boost their morale and when they are too excited they want to do stupid

things I have to cool them downrdquo 119 senior manager

ldquoI care deeply because I have tremendous pride in the people herehellipThe stress is

generated by fear entirely and it‟s fear of what I guess everyone has their

insecurities whether it‟s being fired losing lots of money and appearing stupid in

front of their peer group Whatever it is it‟s definitely fear and if you can take the

fear out of the situation they perform betterrdquo 123 senior trader manager high

experience high pay

Many traders described such episodes of managerial intervention as crucial to their

learning and development For example-

ldquoI lost $1m in the first 10 days of the year This was at a time when if you made $1m

in a year that was huge I was devastated and my boss asked me for lunch at the

weekend - I thought that was the end of my career My boss said bdquoa lot of the guys

think you‟re OK but they are worried you are going to be afraid to trade that you‟re

20

going to be gun shy and lose your confidence We want you to know that we like you

and if you think you‟ve got to buy them buy them and if you‟ve got to sell them sell

them but whatever you do don‟t stop trading‟ So that was a huge relief Since then I

don‟t get too depressed about losing money although there are always good days

and bad daysrdquo 25 low experience medium performance

Other managers clearly gave thought to the relative strengths and weaknesses of more

intuitive versus more analytical traders in their decisions about matching traders to roles -

ldquoA gut trader should trade a liquid market - he might change his feel so he needs to

get out The analytical trader who thinks much more about what he‟s doing will

change their mind less often and trade with a different time frame A gut trader can

be bullish in the morning The analytical trader will look at something for a week

and then put on a position - less important to get in and out He doesn‟t need to be in

a liquid market - in an emerging market you need a more analytical traderrdquo 122

Manager

ldquoDerivatives are very quantitative and people think if you have a PhD you will be

very good because you have an understanding of options theory but this is not

always the case and you tend to overlook things Although you can put the

parameters into the model there are still a lot of things which are uncertain

Sometimes adding a more qualitative feel to it ndashbdquoyes that‟s what the model says but

the risk doesn‟t look right‟ hellip I tend to have a mixture of people on the desk - those

who are more quantitative and those who are more common sense or gut instinct

traders Having the blend is quite useful for bouncing ideasrdquo 124 Manager

These reflections have implications for management strategies in trading environments or

indeed any others where the main role of the operative is complex decision-making under

21

constraints of time and uncertain and incomplete information We consider these points further in

our discussion

Emotional Cues and the Use of Intuition

The second broad theme concerned the role of emotional cues in traderslsquo decision-

making Many of the traders discussed this aspect of emotion as intuition Traderslsquo own accounts

and conceptualizations of intuition fit well with Dane and Prattlsquos (200740) definition of intuition

as ―affectively charged judgments that arise through rapid non-conscious and holistic

associations For example -

ldquo[W]ithout a doubt some of the best bargains are the ones you dont do You know

theyre bad bargains You know It‟s a gut feel Youve looked at the playing field and

you just know this is a bad bargainrdquo 106 high experience moderate pay

Some of the traders see a more subtle and sophisticated role for emotions which represent

an unconscious drawing on experience -

ldquoI think many people do say theyre gut-feel traders but perhaps theyre not analyzing

what theyre actually thinking and theyre seeing a lot of customer flow and a lot of

buyers and they probably dont necessarily realize the reasons why they want to buy

But there are very good traders that say theyre trading off gut feel that I believe

actually have probably reasonable information reasonable thoughts behind it but

they wouldnt literally toss a coinrdquo 55 high experience high pay

Feelings are also seen as a kind of radar directing attention and shaping perceptions

around opportunities to enable them to be promptly seized

ldquoI think what a trader has to have is not necessarily this gut feeling but this nose for

opportunities If an opportunity comes along you have to be able to spot it and see it

22

and sometimes people you typically find in this business - an opportunity is there and

they cant see it and then its taken by someone else and its like oh yeah that was a

good idea but it is gonerdquo 58 high experience low pay

Not only do feelings act as a kind of radar directing attention but they do so in a way that

enables rapid decision making under time pressure As one trader noted -

ldquoTrading includes stuff which is beyond trading Trading is when you make decisions

involving financial risk that have two qualities you have to make them in someone

else‟s time schedule not your own and when you make a decision you have to be

confident when you have incomplete or imperfect information and therefore there

must be some kind of intuitive or qualitative elementrdquo 121 high experience high pay

Experienced traders made much more reference to intuition or gut feellsquo as they often

phrased it than less experienced traders However again there were important differences

between low and high paid traders in the high experience group Low paid traders who talked

about the use of intuition often talked of it in terms of a rather mysterious process You either had

a feeling or not For example

ldquoIt‟s almost like a sixth sense Something comes over you and you feel like - yes I

know they‟re going to be looking to buy these later on or looking to sell these later

onrdquo 116 high experience low pay

By contrast the top paid group tended to reflect critically about the origins of their

intuitions and to bring them together with more objective information -

ldquoIf I do fancy a stock - you have a feeling it feels right it has done nothing for like

two or three months and you‟ve seen sellers and they start to dwindle and it is just

stagnant and then you have a look on the charts you refer to the technical side as

well as the emotional side of the trade So you know a combination of technical and

23

emotional as well as what the analyst thinks as well so you sort of bring the

instruments you have available to you to make the decision rather than the snap

[snaps his finger] I fancy buying thatrdquo 101 high experience high pay

ldquoI may examine opportunities based on intuition that something is going to happen

but the decision is based on something I think is rationalrdquo 68 medium experience

high pay

Reported use of intuition does seem to increase with trader experience However traderslsquo

engagement with their feelings is qualitatively different between low and high performers High

performing traders seem to engage with their intuitions at a meta-cognitive level and make

judgments about the relevance of these feelings to the decision at hand This is consistent with

the growing literature on expertise which points to experience as a necessary but insufficient

condition for the development of expertise and points to the role of extended critical engagement

with practice in developing expertise (Ericsson 2006 Ericsson Krampe amp Tesch-Roemer

1993)

Traders were not universally positive about the role of intuition in market decision making

Some believed reliance on such feelings yields poor outcomes -

ldquoMany traders feel that models have been developed by academics who do not know

markets and [traders] think that gut feeling is more important My experience is that

this is 100 wrong and computers can make better decisions than tradersrdquo 37

medium experience medium pay

Overall however the data support a picture of expert traders having a meta-cognitive

engagement with emotion regulation This process entails discrimination between emotions in

terms of their relevance to the decision at hand and effective strategies for emotion regulation to

enhance performance

24

Empathy

The third identified theme was empathy monitoring own emotions as information

about what other market players might be feeling Only five traders explicitly described

using their own capacity for empathy as a decision making tool Although not frequent in

our data these examples are important illustrating that there is a path for traders beyond

simply seeking to eliminate or reduce the intensity of their emotions These traders

fostered feelings as a source of information about other market actors which they managed

and used in a self-aware analysis One trader described using his own fear as an indicator

of fear in the market Another described actively imagining the feelings of other market

actors ―trying to put myself in [the Bank of England Governorlsquos] feet to develop a feel for

how he feels and thinks 14 high experience high pay

Three traders talked about an emotional affinity with the feelings of people in

national markets (Spain 34 high experience medium pay Italy 70 medium experience

low pay and Japan 117 high experience medium pay) with whom they shared a common

culture and propensity to react emotionally in similar ways to the same market events This

group was small but these data broaden the picture of traders reasoning with emotionlsquo

and offer a potentially rich and fruitful avenue for future research

DISCUSSION AND CONCLUSIONS

To ask whether emotion disturbs or aids traderslsquo decision-making is to ask the wrong

question Traderslsquo emotions and cognition are inextricably linked Therefore a more productive

question to ask in this context is whether there are more or less effective strategies for managing

and using emotion in financial decision-making This has been the thrust of our analysis which

25

sought to move beyond previous work that simply characterizes emotional arousal as detrimental

to performance (eg Lo et al 2005 Schunk and Bersh 2006) The study contributes to our

understanding of the role of emotions in work and decision-making in several distinct ways In

contributing to our understanding of the role of emotion at work this study has particular

relevance in that it considers a work domain which has been theorized as strongly normatively

rational as opposed to a work domain (such as negotiation or customer service) where

performance is primarily dependent on effective social interaction However it is clear from this

study that even within such an analysis-intensive domain as financial trading emotion plays a

central role Traders and their managers are frequently preoccupied with the effective regulation

and use of emotions in their work Our work points to the value of a more nuanced understanding

which considers the role of emotions in decision-making the differential impact of various

emotion regulation strategies the conditions under which gut-feellsquo may support effective

decision-making and the role of empathic responses in understanding the behavior of other

market actors

Effective emotion regulation seems to be a critical success factor in trading for our

findings suggest that the strategies for emotion regulation adopted by expert higher performing

traders are qualitatively different from those of lower performing traders In particular higher

performers are more inclined to regulate emotions through attentional deployment and cognitive

change and may display a willingness to cope with negative feelings in the interests of

maintaining objectivity and pursuing longer term goals The kind of attention and appraisal-

focused emotion regulation strategies used by high-performing traders do not seem to be too

cognitively expensive and are effective in reducing negative experience of emotion (Gross

2002) By contrast less expert traders engage either in avoidant behaviors such as walking

away from the desk or invest significant cognitive effort in modulating their emotional

26

responses This extends previous findings (eg Grandey 2003) concerning the performance

benefits of antecedent versus response-focused emotion regulation in the context of emotion

labor to the very different context of financial decision-making Our findings also suggest that

willingness to endure negative feelings in pursuit of long-term goals may be more adaptive than

purely defensive strategies aimed at maintaining positive feelings (Labouvie-Vief 2003 Tamir

2005)

This study also provides evidence that more effective emotion regulation strategies can be

learned in a financial decision-making context While an individuallsquos preferred approach to

emotion regulation is likely to be influenced by personality traits neuroticism and extroversion in

particular (Gross amp John 2003) our interviews with traders and their managers also point to the

importance of traderslsquo learned strategies for emotion regulation Importantly our study also

suggests that defensive emotion regulation strategies may be problematic because they reduce

opportunities to exercise expert intuition

These findings go well beyond prior research on emotion regulation and performance

(eg Grandey 2003) which has a primary focus on performance in the context of interpersonal

interaction Our findings uniquely address the performance of professional traders for whom

performance is not primarily dependent on interpersonal interaction and which has been

theorized as strongly rational involving the selection of optimal strategies in the face of complex

cognitive demands and requiring attention to a large volume of information with uncertain

relevance

Turning to intuition traders in our study mirror the balance of opinion in the research

literature on intuition They are equivocal about whether feelings and hunches about appropriate

courses of action lead to better or worse outcomes than purely rational analysis There were

strong feelings on both sides with traders being quite evenly divided between the two camps

27

However again our study suggests the importance of a more nuanced approach than simply

asking whether reliance on intuition is good or bad and points towards the conditions in which

reliance on intuitive judgment may be more and less effective The findings suggest that one

characteristic of higher performing traders may be a greater willingness to reflect critically about

their intuitions and feelings about trading These traders often reported relying on intuition but

they tend to weigh their feelings critically alongside other evidence and to reflect about the

provenance of those feelings Lower performing traders may rely on feelings alone and show

less propensity to think critically about the source of hunches This reflection by expert traders

about the provenance of feelings may be particularly salient given Schwarz and Clorelsquos (1983

2003) finding that the impact of emotions on behavior is reduced or disappears when the

relevance of those emotions is explicitly called into question

That traderslsquo reliance on affective cues in decision-making can support effective

performance is consistent with Damasiolsquos observation that deciding advantageously depends on

the use of affective cues in both learning and deciding (Bechara et al 1997 Damasio 1994)

There is increasing evidence that humans are naturally proficient in the ability to acquire

expertise and that encapsulation of experience in expert intuition and perception via system one

provides a means of by-passing cognitive limits (Ericsson 2006) The nature of expertise could

counteract the inherent environmental uncertainties that Tiedens and Linton (2001) identified as

leading to more conscious appraisal of information While not an unequivocal result our finding

of greater critical engagement among higher performing traders with intuitions and their more

sophisticated deployment of intuition in combination with analysis suggests an important

direction for future research

The small number of accounts of traders monitoring their own emotions as a source of

information about the emotions of other market actors was intriguing These data suggest a

28

possibly productive avenue for future research We do not have evidence of performance

outcomes of predictive uses of empathy in this manner but our findings are consistent with

arguments that the evolution of the human brain has been significantly driven by the need to

predict the behavior of other humans often via subtle cues (eg Nicholson 2000)

We suggest that the identification of links between decision-making performance and

emotion regulation in this study has important implications for theory development in two key

fields First while somewhat tacit in much of the literature the implication of many claims in the

decision-making and behavioral finance literatures is that a range of key decision-making biases

are underpinned by mechanisms which involve emotion processes One relevant explicit example

is Thalerlsquos (1985 1999) account of the role of hedonic editinglsquo in mental accounting and the

disposition effect (the tendency to hold losing assets longer than winning assets) This explains

key biases in terms of the desire to maintain positive hedonic tone There is evidence too of

interpersonal variation in propensity to exhibit such biases for example investors vary in their

propensity to exhibit the disposition effect (Shapira amp Venezia 2001 Weber amp Welfens 2008)

In this study we have seen that traders seek to regulate emotions in order to avoid decision biases

and that higher performing traders typically exhibit more sophisticated emotion regulation

strategies This suggests that it would be productive to investigate the role of emotion regulation

as one key source of interpersonal variation in susceptibility to a range of decision biases

A second implication concerns the role of emotion in expert performance While much

attention has been paid to the nature of cognition in expert performance the expertise literature

hardly considers the role of emotion For example examining the index of the Cambridge

Handbook of Expertise and Expert Performance (Ericsson et al 2006) reveals very few

references to emotion and these are peripheral to the main arguments of the chapters which

contain them Our research suggests first that effective emotion regulation may be an important

29

facet of expert performance and second that greater attention should be paid to the interactions

between emotion emotion regulation and expert intuition Further research could test the

proposition that effective expert intuition is reduced by reliance on defensive emotion regulation

strategies

While our study points to the importance of intuition in traderslsquo work it may be that the

relative importance of intuition and analysis vary with task characteristics such as time span of

decision-making Certainly this seemed to be the view of several senior managers with

responsibility for allocating traders to trading roles The interplay that expert traders described

between intuition and analysis is also intriguing The importance of context to the role of affect

in decision-making has been noted in prior research (Forgas amp George 2001) Further research

could usefully explore this aspect of traderslsquo expertise

This study also contains some potentially important implications for practice First it

points to the importance of learned strategies for emotion regulation and the need for effective

support for their development Second our data directly and indirectly point to the key role of

management in this process Our findings suggest that there may be considerable benefits to

skilled managerial interventions that help to steer effective emotion regulation and support

inexperienced traders in developing emotion regulation skills Additionally managers may be

able to help traders to understand the productive role that critically engaged experience-based

intuition may play in decision-making Our evidence suggests that many high performing traders

deploy a reflective and critical approach to the use and development of intuition well-founded in

experience Managers could help to guide this process through coaching The contextual

dependence of high quality intuitions suggests they are quite domain specific and may not

transfer across contexts As several informants told us this is especially true for traders operating

under different market conditions

30

We heard repeated concerns from senior managers who worried about traders who had

not seen a bear market and would not operate well when that occurred We also heard many

stories of people transferring between trading areas and needing time to re-contextualize

expertise before their intuitions could be considered reliable Thus managers have a role in

helping traders to extend the boundaries of their expertise Given recent events in financial

markets our findings may be relevant to an understanding of how traders react under massively

changed trading conditions and how those reactions might either contribute to or result from

market volatility

This research has some important limitations First although we have argued for the

importance of an account of emotion that includes the experience of emotion as Pham (2004

368) notes the affective system is focused on the present Thus people can be poor at recalling or

predicting emotions There are limits to the human capacity to introspect on emotion processes

and to recall the experience of emotion These limits are also subject to wide individual

differences The capacity for introspection and recall will also vary between individuals For this

reason studies such as ours need to be complemented with more physiologically based research

as well as further qualitative and quantitative studies

Second as in all work contexts traders subscribe to norms of socially sanctioned

behavior and to common narratives about the nature of their work We have not treated emotional

labor as a primary component of traderslsquo work and performance The majority of work

interactions are carried out through highly abbreviated electronic exchanges which provide a poor

medium for the communication of emotion However there is a sense in which traders engage in

emotional labor since especially for novices there are social pressures to comply with display

rules which emphasize the avoidance of displays of strong emotion One common narrative

thread that ran though many traderslsquo accounts of their work was a representation of trading work

31

as principally concerned with rational analysis from which emotions are a dangerous distraction

This narrative seemed particularly strong in the accounts of less experienced traders Although as

we have seen the mask would often slip as they discussed their work Some traderslsquo accounts

were clearly colored by a desire to conform to this mode of self-presentation In consequence it is

possible that in our interviews and during data analysis we were at times unable to distinguish

effectively between defensive denial of emotion and effective regulation of emotion This would

be another avenue for future research

To conclude we know that emotions are a rich source of experience in everyday life but

at the same time in work contexts they can be a source of vulnerability a wayward influence over

judgment and a source of disturbance to process The more ―rational-economic such

environments are the more likely we are to hold such beliefs (Nicholson 2000) Our research

illustrates that this position is false or at best short-sighted In the hyper-rational world of

trading in financial markets we did find some evidence that emotions disturbed performance but

mostly among the inexperienced and un-reflective traders The best traders are able to regulate

emotions effectively and incorporate relevant emotions as information ndash signals or a kind of

radar that contain information about risks what is going on in the minds of others and the weight

and relevance to be accorded to onelsquos own past experience

32

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Psychology 71 230-244

Baumeister R F Bratslavsky E Muraven M amp Tice D M (1998) Ego depletion Is the

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1265

Bechara A Damasio A Tranel D amp Damasio A R (1997) Deciding advantageously before

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Bower G H (1981) Mood and memory American Psychologist 36 129 ndash 148

Bower G H (1991) Mood congruity of social judgments In J P Forgas (Ed) Emotion and

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Braun V amp Clarke V (2006) Using thematic analysis in psychology Qualitative Research in

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Buck R (1999) The biological affects a typology Psychological Reveiw 106 301-336

Damasio A R (1994) Descartes‟ error Emotion reason and the human brain New York

Putnam

Dane E amp Pratt M G (2007) Exploring intuition and its role in managerial decision making

The Academy of Management Review 32 33-54

De Bondt W Palm F amp Wolff C (2004) Introduction to the special issue on behavioral

finance Journal of Empirical Finance 11 423-427

Dreyfus H amp Dreyfus S (2005) Expertise in real world contexts Organization Studies 26

779-792

Epstein S Pacini R Denes-Raj V amp Heier H (1996) Individual differences in intuitive-

experiential and analytical-rational thinking styles Journal of Personality and Social

Psychology 71 390-405

Ericsson K A Krampe R T amp Tesch-Roemer C (1993) The role of deliberate practice in the

acquisition of expert performance Psychological Review 100 363-406

Ericsson K A (2006) An introduction to the Cambridge Handbook of Expertise and Expert

Performance its development organization and content In K A Ericsson amp N Charness

amp P J Feltovich amp R R Hoffman (Eds) The Cambridge Handbook of Expertise and

Expert Performance 1st ed 3-20 Cambridge Cambridge University Press

Fama E F (1991) Efficient Capital Markets II The Journal of Finance 46 1575-1617

Fama E F (1998) Market efficiency long-term returns and behavioral finance Journal of

Financial Economics Vol 49 283-306

Fenton-OCreevy M Nicholson N Soane E amp Willman P (2005) Traders Risks Decisions

and Management in Financial Markets Oxford Oxford University Press

Finucane M L Alhakami A Slovic P amp Johnson S M (2000) The affect heuristic in

judgments of risks and benefits Journal of Behavioral Decision Making 13(1) 1-17

Forgas JP amp George JM (2001) Affective influences on judgments and behavior in

organizations An information processing perspective Organizational Behavior and

Human Decision Processes 86(1) 3-34

Grandey AA (2000) Emotion Regulation in the Workplace A new way to conceptualize

Emotional Labor Journal of Occupational Health Psychology 5(1) 95-110

33

Grandey A A (2003) When the show must go on surface acting and deep acting as

determinants of emotional exhaustion and peer-rated service delivery Academy of

Management Journal 46 86-96

Gray JA (1999) Cognition emotion conscious experience and the brain In T Dalgleish and

MJ Power (Eds) Handbook of Cognition and Emotion (pp83-102) Chichester England

Wiley

Gross J (2002) Emotion regulation affective cognitive and social consequences

Psychophysiology 39 281

Gross J J amp John O P (2003) Individual differences in two emotion regulation processes

Implications for affect relationships and well-being Journal of Personality and Social

Psychology 85(2) 348-362

Gross J J amp Thompson R A (2007) Emotion regulation Conceptual foundations In J J

Gross (Ed) Handbook of emotion regulation New York NY Guilford Press

Isen A M Shalker T E Clark M amp Karp L (1978) Affect accessibility of material in

memory and behavior A cognitive loop Journal of Personality and Social Psychology

36 1-12

Johnson E amp Tversky A (1983) Affect generalization and the perception of risk Journal of

Personality and Social Psychology 45(1) 20-31

Kavanaugh D amp Bower G (1985) Mood and self-efficacy Impact of job and sadness on

perceived capabilities Cognitive Therapy and Research 9 507-525

Klein G A Calderwood R amp Clinton Cirocco A (1986) Rapid decision-making on the

fireground Human Factors and Ergonomics Society 30th Annual Meeting Vol 1 576-

580

Knorr-Cetina K amp Brugger U (2002) Traders Engagement with Markets A Postsocial

Relationship Theory Culture and Society 19(5-6) 161-185

Labouvie-Vief G (2003) Dynamic integration Affect cognition and the self in adulthood

Current Directions in Psychological Science 12 201-206

Lerner J S amp Keltner D (2001) Fear anger and risk Journal of Personality and Social

Psychology 81(1) 146-159

Lerner J S Small D A amp Loewenstein G (2004) Heart strings and purse strings Carryover

effects of emotions on economic decisions Psychological Science 15(5) 337-341

Lo A Repin D amp Steenbarger B (2005) Fear and greed in financial markets A clinical study

of day traders American Economic Review 95 352-359

Lo A W amp Repin D V (2002) The Psychophysiology of Real-Time Financial Risk

Processing Journal of Cognitive Neuroscience 14 323-339

MacKenzie D (2006) An Engine Not A Camera How Financial Models Shape Markets

Cambridge Mass MIT Press

Mayer JD amp Hanson A (1995) Mood-congruent judgment over time Personality and Social

Psychology Bulletin 21 237-244

Mayer JD DiPaolo M and Salovey P (1990) Perceiving affective content in ambiguous

visual stimuli a component of emotional intelligence Journal of Personality Assessment

54 772-781

Miller G (2003) The cognitive revolution a historical perspective Trends in Cognitive Science

7 141

Muraven M amp Baumeister R F (2000) Self-regulation and depletion of limited resources

Does self-control resemble a muscle Psychological Bulletin 126 247-259

Nicholson N (2000) Managing the Human Animal London ThomsonTexere

34

Peterson R L (2007) Affect and financial decision-making How neuroscience can inform

market participants The Journal of Behavioral Finance 8(2) 70-78

Pham M T (2004) The logic of feeling Journal of Consumer Psychology 14 360-369

Phelps E A (2006) Emotion and cognition Insights from studies of the human amygdala

Annual Review of Psychology 57 27-53

Sayer A (1997) Essentialism social constructionism and beyond The Sociological Review 45

453-487

Shapira Z amp Venezia I (2001) Patterns of behavior of professionally managed and

independent investors Journal of Banking and Finance 25 1573ndash1587

Schunk D amp Betsch C (2006) Explaining the heterogeneity in utility functions by individual

differences in decision modes Journal of Economic Psychology 27 386-401

Schwager J D (1993) Market Wizards Interviews with Top Traders New York Collins

Schwarz N amp Clore G L (1983) Mood misattribution and judgments of well-being

Informative and directive functions of affective states Journal of Personality and Social

Psychology 45 513-523

Seo M G Barrett L F amp Bartunek J M (2004) The role of affective experience in work

motivation Academy of Management Review 29 423-439

Seo M G amp Barrett L F (2007) Being emotional during decision makingmdashgood or bad An

empirical investigation The Academy of Management Journal 50 923-940

Shefrin H (2000) Beyond Greed and Fear Understanding Behavioral Finance and the

Psychology of Investing Boston MA Harvard Business School Press

Stokes A F Kemper K amp Kite K (1997) Aeronautical decision making cue recognition and

expertise under time pressure In C E Zsambok amp G Klein (Eds) Naturalistic Decision

Making pp 183-196 Mahwah NJ Erlbaum

Tamir M (2005) Dont worry be happy Neuroticism trait-consistent affect regulation

and performance Journal of Personality and Social Psychology 89 (3) 449 ndash

461

Thaler R H (1985) Mental accounting and consumer choice Marketing Science 4(3) 199-214

Thaler R H (1993) Advances In Behavioral Finance New York Russel Sage Foundation

Thaler R H (1999) Mental accounting matters Journal of Behavioral Decision Making 12(3)

183-206

Tiedens L amp Linton S (2001) Judgment under emotional certainty and uncertainty the effects

of specific emotions on information processing Journal of Personality and Social

Psychology 81(6) 973-988

Todd P M amp Gigerenzer G (2007) Environments that make us smart Ecological rationality

Current Directions in Psychological Science 16 167-171

Totterdell P Briner R B Parkinson B amp Reynolds S (1996) Fingerprinting time series

dynamic patterns in self-report and performance measures uncovered by a graphical non-

linear method British Journal of Psychology 87(1) 43-60

Weber M amp Welfens F (2008) Splitting the Disposition Effect Asymmetric Reactions

Towards bdquoSelling winners‟ and bdquoHolding Losers‟ Working Paper University of

Mannheim

Wright WF amp Bower GH (1992) Mood effects on subjective probability assessment

Organizational Behavior and Human Decision Processes 52 276ndash91

9

In summary the emotions literature gives considerable support to the idea that emotions

have multiple critical impacts on decision-making Some of these can be characterized as bias

with the potential to be detrimental to decision-making performance However it is also apparent

that there is an alternative position it is not emotions per se that are detrimental to decision-

making performance but rather that expertise and the regulation of emotions determine whether

emotions have positive or negative impacts on decision performance

Emotion Regulation

Accounts of emotions as bias focus primarily on the potential for emotions to have a

negative influence on performance By contrast accounts of emotions as information focus

primarily on the valuable role of emotions in encapsulating prior relevant experience In

principle these two perspectives may not incompatible and effective emotion regulation may

have a role in reducing the biasing effect of emotion while retaining sensitivity to the information

which emotions may carry It thus seems likely that the regulation of emotion may play an

important role in emotion performance effects Gross (2002 Gross amp Thompson 2007)

distinguishes a series of different stages in emotion episodes and five associated emotion

regulation strategies The model suggests that people both choose and modify situations

Situations require attention and appraisal which leads to an emotional response

Attempts to manage emotions may focus on any of the stages indicated in the above

model One approach to managing emotions is to select avoid or modify situations Other

approaches include focusing attention on emotionally salient elements of a situation and where

emotional responses might be difficult to cope with reframing situations to modify the emotional

response It is also possible to avoid emotional responses by refocusing attention elsewhere Each

of these strategies could lead to responses being modulated or suppressed Gross and Thompson

(2007 16) make clear that this model of emotions and their regulation is something of a

10

simplification However the model usefully illustrates the central role of emotion regulation in

decision-making

In addition to theoretical modeling there is empirical evidence for a relationship between

strategies for emotion regulation and a range of important outcomes Recent research has paid

particular attention to the difference in outcomes between antecedent-focused emotion regulation

strategies which seek to change emotions before emotion responses have become fully activated

and response-focused regulation strategies which modify behavior and emotion expression once

the emotion response is underway Emotion regulation strategies have been shown to have

differential effects on outcomes including cognitive performance health and qualities of social

interaction (Gross and Thompson 2007) In the domain of work performance much attention has

focused on the emotional labor required by customer service interactions Here emotion

regulation has been characterized as a process of deep and surface acting Surface acting is the

faking of emotion display to accord with organization display rules Deep acting involves

modifying inner feelings Grandey (2000) considers emotional labor as a subset of emotion

regulation and equates antecedent-focused and response-focused regulation with deep and surface

acting respectively In a study of front-line service workers Grandey (2003) found antecedent-

focused emotion regulation was associated with greater effectiveness in relating to customers in a

warm friendly manner while response-focused emotion regulation was associated with emotional

exhaustion and greater tendency to break character and reveal negative emotions in a service

encounter This result supports Grosslsquos earlier work (2002) There is also some evidence on

emotion regulation and financial decision-making Seo and Barret (2007) found that investors

who were better able to identify and discriminate among their current feelings achieved superior

decision-making performance They argued that this relationship was mediated by effective

regulation of the influence of feelings on their decision-making

11

In the present study we go beyond the study of emotion regulation in a context of work

performance that depends primarily on social interaction In contrast to emotional labor studies

which focus on the context of interpersonal interaction most trading nowadays (and in all cases

we studied) is conducted electronically via computer or through highly abbreviated and

formalized electronic messages with counterparties Rather than depending on appropriate

emotion display in the context of customer interaction or negotiating with counterparties trader

performance depends on selecting optimal trading strategies in the face of complex cognitive

demands and the need to process significant amounts of information with uncertain relevance

(Knorr-Cetina amp Bruegger 2002) We now turn to the present study

THE STUDY AND METHODS

The data reported in this paper were collected as part of a large multifaceted study of the

role and behavior of traders working in investment banks For this paper we have returned to this

data corpus to examine the considerable amount that traders told us about their work and

emotion an aspect touched on only superficially in previous analysis of this data (see Fenton-

OCreevy Nicholson Soane and Willman 2005 for an extended account of the study)

Participants

Participants were sampled from four leading investment banks with offices in the City of

London Three banks were American and one was European Managers in each organization were

asked to select a representative sample of traders from a range of markets trading in stocks

bonds and derivatives The mean age of participants was 3281 years (sd = 491) There was

variation in traderslsquo experience with overall tenure (including time with previous employers) in a

range from 6 months to 30 years and a mean job tenure of 780 years (sd = 558) The trader

sample comprised 116 men (983) and 2 women (17) The participants were traders in

equities bonds and derivatives most engaged in either market making or proprietary trading or

12

both We gathered information on individual trader characteristics and performance and carried

out semi-structured interviews with each trader and with a further 10 senior managers Where

traders were also managers we interviewed them twice once as a trader and once as a manager

Data

Qualitative data Interviews lasted between 30 and 90 minutes They were recorded and

transcribed in full The interviews ranged over multiple aspects of the traderslsquo roles and work

The data set for this study consisted of the portions of the interviews relevant to the role of

feelings in traderslsquo work and decision making Traders were asked to describe the range of

emotions they experienced during trading Follow-up questions encouraged them to explore the

long-term and short-term effects of emotions on their decision making and trading strategy the

role of intuition in their trading and the impact of emotions on performance Managers were

asked to describe how they evaluated and managed trader performance Again this often

produced talk about traderslsquo feelings and how they were managed

Performance data Hard performance data for traders are difficult to obtain Measures

such as value at risk trading outcomes and profit and loss are highly confidential in this setting

and were not available to us so we used total remuneration as our measure of trader performance

We felt this to be a reasonable proxy for decision-performance since a high proportion of total

remuneration is a variable annual performance linked bonus and the non-bonus elements tend to

reflect longer term financial performance in this very performance oriented sector We have

treated this variable as an indicator of expertise which Ericsson (2006) defines as reliably

superior performancelsquo Traders were asked to state their income including bonus in terms of

four categories (1 pound50000 - pound99999 (N = 4) 2 pound100000 to pound299999 (N = 41) 3 pound300000-

pound499999 (N = 34) 4 more than pound500000(N = 38) One trader declined to provide this

information

13

Analysis

The raw data were the full transcripts of all interviews We used a thematic analysis

approach which we judged to be particularly well suited to the present study As Braun and

Clarke (2006 78) note thematic analysis does not rest on a single epistemic position but can

span both realist and constructivist approaches We take the position that emotions have both a

measurable biological reality and exist in the realm of socially constructed personal experience in

which emotions have personal and social meaning

Data were open-coded by each author separately then in discussion using the NVIVO

program Common statements were identified and used as the basis for a first set of coding

categories which were subsequently refined and consolidated Coding categories were thus both

emergent from the interviews and drew on constructs identified in the literature (eg approaches

to emotion regulation) relevant to emerging themes Thus coding was both theoretical and

inductive As we analyzed the data and drew tentative conclusions we explicitly sought

disconfirming evidence to test the robustness of our insights In a later stage of analysis we

partitioned the sample into groups of low (lt5 years n=25) medium (5 to 10 years n=48) and

high experience (gt10 years N=45) and into groups of low (remunerationlt pound300k N=45) medium

(pound300k- pound500k N=34) and high expertise (gt pound500k N=38) We compare interview responses of

three specific groups inexperienced low paid traders (N=18) highly experienced but low paid

traders (N=15) and high paid traders (N=38) The remainder of the sample were medium

experience and pay There were no low experience high pay traders We chose the three

comparison groups to provide maximal contrast in differentiating the characteristics associated

with different levels of experience and expertise respectively

14

In Table 1 we summarize our key findings and the nature of the evidence for each finding

In the final column we note our sense of the strength of the evidence for each finding This

represents a qualitative conclusion arrived at though discussion between the authors and drawing

on quantity consistency importance and clarity of supporting data and existence of any

disconfirming evidence In the next section of the paper we discuss these findings and the

evidence for them in more detail Direct quotes are verbatim accompanied by the case number of

the respondent and their classification in terms of experience and pay level

TABLE 1 ABOUT HERE

TRADERSrsquo UNDERSTANDINGS OF EMOTION IN THEIR TRADING PRACTICE

Emotional experience and regulation

For many traders especially the less experienced trading is marked by significant and

persistent emotional responses to successes and setbacks It is relevant to note the distinction

between mood and emotion since both were relevant to traders Mood can be understood as a

relatively diffuse emotional climate which persists over time and not anchored to specific

situations or cognitions In contrast emotions typically have specific objects and give rise to

behavioral response tendencies relevant to those objects (Totterdell Briner et al 1996)

ldquoWhen you lose money you could sit down and cry Anybody who says you couldn‟t

isn‟t being honest with you Of course when it‟s good it‟s fantastic The highs and

lows of a trader‟s life are euphoria or absolute dismayrdquo 106 high experience

medium pay

While these emotional responses would often be triggered by specific events or series of

events in many cases the impact on mood would persist for significant periods with

consequences for subsequent trading behavior For example one manager described a trader

15

working for him as ―having been in the wilderness his confidence totally shattered for about

two years before slowly recovering from a string of losses Many talked about needing weeks or

even months to recover from the impact of major losses especially early in their careers Others

talked about the dangers of false confidence or euphoria which could persist for some time after a

big win

ldquoPeople get a bit arrogant when they have good times but this can be dangerous

because then they stop thinking as muchrdquo 18 medium experience medium pay

ldquoI tend to feel more cautious when losing moneyhellipIf I am having a down month I‟ll

look at trades which I would do if I was having a good month and say I don‟t like it

enough to take the risk on it I become more selective more risk averse and to do a

trade I need to see more than one reason why a trade will work and then might put it

on but not in a huge size When making money I can be more slack 29 high

experience high pay

However our data also suggest emotion regulation is critical to moderating the impact of

emotions on traderslsquo decision making Senior traders and trader managers frequently talked about

the way in which they had developed a capacity to regulate their own emotions and trade more

evenly regardless of success and setbacks

ldquoYou learn to be able to deal with emotions It doesn‟t get to me as much There

were situations when I was extremely stressed up and then you feel physically ill and

you really feel on the verge of throwing up But that was a long time ago and doesn‟t

happen so much now You have seen the ups and downs more You have experienced

them and in a way you are probably more prepared for it and you are aware that

every now and then it will happenhellip but it doesn‟t get to you all that much because

you are aware that it will happen 6 medium experience high pay

16

We examined emotion regulation and its relevance to performance further by considering

data from the three comparison groups (based on experience and pay) We noticed some

important differences in the way in which these groups discussed the interaction between

emotion trading and the use of intuition First there seemed to be notable differences in the

strategies employed for emotion regulation which we describe below in the language of the

Gross and Thompson model (2007) When asked directly about emotion traders in the low

experience group typically started by presenting themselves as fairly immune to the impact of

emotion on their trading However as the interview progressed they would often reveal rather

more vulnerability to emotions than they had claimed initially Take for example this trader who

had been trading for a little less than 4 years -

ldquoI‟m bit of a cold fish I don‟t think emotions greatly affect my decision-making If

you are making money you are achieving your objectivehellip

[But later]

hellipWhen you lose money it can be horrendous violent mood swings You don‟t know

what to do when you lose moneyrdquo 38 low experience low pay

There tended to be two responses types when these traders did talk about their emotions

Some in the low experience low pay group did not talk at all about actively managing their

emotions Others talked about removing themselves from situations when their emotions became

a problem (situation modification) or avoiding situations entirely which make them feel bad

(situation selection)

ldquoI think there is a strong emotional element to trading I think that anyone who‟s

doing it properly and has got their head screwed on is doing everything they can

consciously to overrule that and if I feel that I‟m trading emotionally I will walk off

17

the desk have a glass of water walk up and down the street and then come back and

make decisions when I‟m hopefully not emotionalrdquo 43 low experience low pay

Traders in the experienced group more commonly talked about strategies for emotion

regulation However the nature of these strategies tended to vary between the low paid and high

paid groups In the high experience low paid group traders seemed to find it hard to articulate

how they managed their emotions and the emotion regulation strategies they identified were

predominately situation avoidance situation modification and response modulation

ldquoIf you get two or three decisions wrong you find you might not take a risk for a

month until you build up your confidence There‟s definitely a lot of confidence

involvedrdquo 104 high experience low pay

ldquoI try and keep my emotions under tight controlrdquo 105 high experience low pay

There is a marked contrast in the discourse of the high performing traders who often

showed a greater willingness to reflect on their emotion-driven behavior (the two exceptions to

this were traders with whom we had only short interviews with little opportunity for extended

reflection rather than any denial of the role of emotion) Emotion regulation for these traders

tended to focus mainly on how they directed their attention (attentional deployment) and how

they framed experiences of loss and gain (cognitive change)

ldquoBig losses and big gains can swap around fairly quickly and once you understand

that then you stop concentrating on the loss and you start concentrating more on how

to make money back hellip One big trade is not going to make anyone and one big loss

doesn‟t destroy yourdquo 15 high experience high pay

ldquoExperience definitely helps having traded through the crash etc Youve seen

different scenarios and newer people its like oh my god its the end of the world

whereas there is life after death and so I think that type of experience helps It doesnt

18

necessarily help the new situation on what to do but it just helps your judgmentrdquo 55

high experience high pay

There was a notable absence of avoidant behavior in this group Several participants told

stories which implied a significant degree of persistence in the face of negative emotion

ldquoI had one very bad year from which I learned quite a lot I learned that the

overshooting can go on for a very long time it can be very painful you can hit risk

limits hellip I did not want to get out of the trades so kept the trades and then next year

they made more money than they lost I don‟t think I panicked but I was getting calls

from the CEO Reason prevailed in the end Emotionally it was not easy to cope

with There were times when the desk was down close to $100m I lost almost that

much in days I was under a lot of pressure from New York because they did not

understand my positions but in the end we managed to keep the positions and made

money the next year The hardest thing was persuading others that I had a good

traderdquo 14 high experience high pay

This willingness among some of the high performing traders to experience negative

emotion in order to achieve longer term goals is consistent with Labouvie-Vieflsquos (2003)

argument that positive self-development requires not just strategies to optimize positive affect

but also the ability to tolerate tension and negativity to achieve long term goals

However there may be another important reason why response modulation strategies are

maladaptive for traders As we have seen above while poorly regulated emotions carry over to

subsequent trading and risk biasing subsequent trading behavior emotion cues generated by

reactions to information relevant to current trading under time constraints play an important role

in guiding attention and rapidly choosing appropriate action Both poor regulation of non-

19

relevant emotions and recourse to the attempted suppression of all feeling run the risk of masking

these important cues

The Role of Managers in Emotion Regulation

Further evidence of the importance of emotions and their regulation to trader performance

came from interviews with trader managers A few managers described their role in primarily

technical terms focusing on risk management and personal supervision of problematic trades

However many of those we interviewed clearly saw regulating the emotions of traders who

worked for them as a key element in managing trader performance

ldquoI have to play the role of director of emotions in the sense that when they are down

you have to boost their morale and when they are too excited they want to do stupid

things I have to cool them downrdquo 119 senior manager

ldquoI care deeply because I have tremendous pride in the people herehellipThe stress is

generated by fear entirely and it‟s fear of what I guess everyone has their

insecurities whether it‟s being fired losing lots of money and appearing stupid in

front of their peer group Whatever it is it‟s definitely fear and if you can take the

fear out of the situation they perform betterrdquo 123 senior trader manager high

experience high pay

Many traders described such episodes of managerial intervention as crucial to their

learning and development For example-

ldquoI lost $1m in the first 10 days of the year This was at a time when if you made $1m

in a year that was huge I was devastated and my boss asked me for lunch at the

weekend - I thought that was the end of my career My boss said bdquoa lot of the guys

think you‟re OK but they are worried you are going to be afraid to trade that you‟re

20

going to be gun shy and lose your confidence We want you to know that we like you

and if you think you‟ve got to buy them buy them and if you‟ve got to sell them sell

them but whatever you do don‟t stop trading‟ So that was a huge relief Since then I

don‟t get too depressed about losing money although there are always good days

and bad daysrdquo 25 low experience medium performance

Other managers clearly gave thought to the relative strengths and weaknesses of more

intuitive versus more analytical traders in their decisions about matching traders to roles -

ldquoA gut trader should trade a liquid market - he might change his feel so he needs to

get out The analytical trader who thinks much more about what he‟s doing will

change their mind less often and trade with a different time frame A gut trader can

be bullish in the morning The analytical trader will look at something for a week

and then put on a position - less important to get in and out He doesn‟t need to be in

a liquid market - in an emerging market you need a more analytical traderrdquo 122

Manager

ldquoDerivatives are very quantitative and people think if you have a PhD you will be

very good because you have an understanding of options theory but this is not

always the case and you tend to overlook things Although you can put the

parameters into the model there are still a lot of things which are uncertain

Sometimes adding a more qualitative feel to it ndashbdquoyes that‟s what the model says but

the risk doesn‟t look right‟ hellip I tend to have a mixture of people on the desk - those

who are more quantitative and those who are more common sense or gut instinct

traders Having the blend is quite useful for bouncing ideasrdquo 124 Manager

These reflections have implications for management strategies in trading environments or

indeed any others where the main role of the operative is complex decision-making under

21

constraints of time and uncertain and incomplete information We consider these points further in

our discussion

Emotional Cues and the Use of Intuition

The second broad theme concerned the role of emotional cues in traderslsquo decision-

making Many of the traders discussed this aspect of emotion as intuition Traderslsquo own accounts

and conceptualizations of intuition fit well with Dane and Prattlsquos (200740) definition of intuition

as ―affectively charged judgments that arise through rapid non-conscious and holistic

associations For example -

ldquo[W]ithout a doubt some of the best bargains are the ones you dont do You know

theyre bad bargains You know It‟s a gut feel Youve looked at the playing field and

you just know this is a bad bargainrdquo 106 high experience moderate pay

Some of the traders see a more subtle and sophisticated role for emotions which represent

an unconscious drawing on experience -

ldquoI think many people do say theyre gut-feel traders but perhaps theyre not analyzing

what theyre actually thinking and theyre seeing a lot of customer flow and a lot of

buyers and they probably dont necessarily realize the reasons why they want to buy

But there are very good traders that say theyre trading off gut feel that I believe

actually have probably reasonable information reasonable thoughts behind it but

they wouldnt literally toss a coinrdquo 55 high experience high pay

Feelings are also seen as a kind of radar directing attention and shaping perceptions

around opportunities to enable them to be promptly seized

ldquoI think what a trader has to have is not necessarily this gut feeling but this nose for

opportunities If an opportunity comes along you have to be able to spot it and see it

22

and sometimes people you typically find in this business - an opportunity is there and

they cant see it and then its taken by someone else and its like oh yeah that was a

good idea but it is gonerdquo 58 high experience low pay

Not only do feelings act as a kind of radar directing attention but they do so in a way that

enables rapid decision making under time pressure As one trader noted -

ldquoTrading includes stuff which is beyond trading Trading is when you make decisions

involving financial risk that have two qualities you have to make them in someone

else‟s time schedule not your own and when you make a decision you have to be

confident when you have incomplete or imperfect information and therefore there

must be some kind of intuitive or qualitative elementrdquo 121 high experience high pay

Experienced traders made much more reference to intuition or gut feellsquo as they often

phrased it than less experienced traders However again there were important differences

between low and high paid traders in the high experience group Low paid traders who talked

about the use of intuition often talked of it in terms of a rather mysterious process You either had

a feeling or not For example

ldquoIt‟s almost like a sixth sense Something comes over you and you feel like - yes I

know they‟re going to be looking to buy these later on or looking to sell these later

onrdquo 116 high experience low pay

By contrast the top paid group tended to reflect critically about the origins of their

intuitions and to bring them together with more objective information -

ldquoIf I do fancy a stock - you have a feeling it feels right it has done nothing for like

two or three months and you‟ve seen sellers and they start to dwindle and it is just

stagnant and then you have a look on the charts you refer to the technical side as

well as the emotional side of the trade So you know a combination of technical and

23

emotional as well as what the analyst thinks as well so you sort of bring the

instruments you have available to you to make the decision rather than the snap

[snaps his finger] I fancy buying thatrdquo 101 high experience high pay

ldquoI may examine opportunities based on intuition that something is going to happen

but the decision is based on something I think is rationalrdquo 68 medium experience

high pay

Reported use of intuition does seem to increase with trader experience However traderslsquo

engagement with their feelings is qualitatively different between low and high performers High

performing traders seem to engage with their intuitions at a meta-cognitive level and make

judgments about the relevance of these feelings to the decision at hand This is consistent with

the growing literature on expertise which points to experience as a necessary but insufficient

condition for the development of expertise and points to the role of extended critical engagement

with practice in developing expertise (Ericsson 2006 Ericsson Krampe amp Tesch-Roemer

1993)

Traders were not universally positive about the role of intuition in market decision making

Some believed reliance on such feelings yields poor outcomes -

ldquoMany traders feel that models have been developed by academics who do not know

markets and [traders] think that gut feeling is more important My experience is that

this is 100 wrong and computers can make better decisions than tradersrdquo 37

medium experience medium pay

Overall however the data support a picture of expert traders having a meta-cognitive

engagement with emotion regulation This process entails discrimination between emotions in

terms of their relevance to the decision at hand and effective strategies for emotion regulation to

enhance performance

24

Empathy

The third identified theme was empathy monitoring own emotions as information

about what other market players might be feeling Only five traders explicitly described

using their own capacity for empathy as a decision making tool Although not frequent in

our data these examples are important illustrating that there is a path for traders beyond

simply seeking to eliminate or reduce the intensity of their emotions These traders

fostered feelings as a source of information about other market actors which they managed

and used in a self-aware analysis One trader described using his own fear as an indicator

of fear in the market Another described actively imagining the feelings of other market

actors ―trying to put myself in [the Bank of England Governorlsquos] feet to develop a feel for

how he feels and thinks 14 high experience high pay

Three traders talked about an emotional affinity with the feelings of people in

national markets (Spain 34 high experience medium pay Italy 70 medium experience

low pay and Japan 117 high experience medium pay) with whom they shared a common

culture and propensity to react emotionally in similar ways to the same market events This

group was small but these data broaden the picture of traders reasoning with emotionlsquo

and offer a potentially rich and fruitful avenue for future research

DISCUSSION AND CONCLUSIONS

To ask whether emotion disturbs or aids traderslsquo decision-making is to ask the wrong

question Traderslsquo emotions and cognition are inextricably linked Therefore a more productive

question to ask in this context is whether there are more or less effective strategies for managing

and using emotion in financial decision-making This has been the thrust of our analysis which

25

sought to move beyond previous work that simply characterizes emotional arousal as detrimental

to performance (eg Lo et al 2005 Schunk and Bersh 2006) The study contributes to our

understanding of the role of emotions in work and decision-making in several distinct ways In

contributing to our understanding of the role of emotion at work this study has particular

relevance in that it considers a work domain which has been theorized as strongly normatively

rational as opposed to a work domain (such as negotiation or customer service) where

performance is primarily dependent on effective social interaction However it is clear from this

study that even within such an analysis-intensive domain as financial trading emotion plays a

central role Traders and their managers are frequently preoccupied with the effective regulation

and use of emotions in their work Our work points to the value of a more nuanced understanding

which considers the role of emotions in decision-making the differential impact of various

emotion regulation strategies the conditions under which gut-feellsquo may support effective

decision-making and the role of empathic responses in understanding the behavior of other

market actors

Effective emotion regulation seems to be a critical success factor in trading for our

findings suggest that the strategies for emotion regulation adopted by expert higher performing

traders are qualitatively different from those of lower performing traders In particular higher

performers are more inclined to regulate emotions through attentional deployment and cognitive

change and may display a willingness to cope with negative feelings in the interests of

maintaining objectivity and pursuing longer term goals The kind of attention and appraisal-

focused emotion regulation strategies used by high-performing traders do not seem to be too

cognitively expensive and are effective in reducing negative experience of emotion (Gross

2002) By contrast less expert traders engage either in avoidant behaviors such as walking

away from the desk or invest significant cognitive effort in modulating their emotional

26

responses This extends previous findings (eg Grandey 2003) concerning the performance

benefits of antecedent versus response-focused emotion regulation in the context of emotion

labor to the very different context of financial decision-making Our findings also suggest that

willingness to endure negative feelings in pursuit of long-term goals may be more adaptive than

purely defensive strategies aimed at maintaining positive feelings (Labouvie-Vief 2003 Tamir

2005)

This study also provides evidence that more effective emotion regulation strategies can be

learned in a financial decision-making context While an individuallsquos preferred approach to

emotion regulation is likely to be influenced by personality traits neuroticism and extroversion in

particular (Gross amp John 2003) our interviews with traders and their managers also point to the

importance of traderslsquo learned strategies for emotion regulation Importantly our study also

suggests that defensive emotion regulation strategies may be problematic because they reduce

opportunities to exercise expert intuition

These findings go well beyond prior research on emotion regulation and performance

(eg Grandey 2003) which has a primary focus on performance in the context of interpersonal

interaction Our findings uniquely address the performance of professional traders for whom

performance is not primarily dependent on interpersonal interaction and which has been

theorized as strongly rational involving the selection of optimal strategies in the face of complex

cognitive demands and requiring attention to a large volume of information with uncertain

relevance

Turning to intuition traders in our study mirror the balance of opinion in the research

literature on intuition They are equivocal about whether feelings and hunches about appropriate

courses of action lead to better or worse outcomes than purely rational analysis There were

strong feelings on both sides with traders being quite evenly divided between the two camps

27

However again our study suggests the importance of a more nuanced approach than simply

asking whether reliance on intuition is good or bad and points towards the conditions in which

reliance on intuitive judgment may be more and less effective The findings suggest that one

characteristic of higher performing traders may be a greater willingness to reflect critically about

their intuitions and feelings about trading These traders often reported relying on intuition but

they tend to weigh their feelings critically alongside other evidence and to reflect about the

provenance of those feelings Lower performing traders may rely on feelings alone and show

less propensity to think critically about the source of hunches This reflection by expert traders

about the provenance of feelings may be particularly salient given Schwarz and Clorelsquos (1983

2003) finding that the impact of emotions on behavior is reduced or disappears when the

relevance of those emotions is explicitly called into question

That traderslsquo reliance on affective cues in decision-making can support effective

performance is consistent with Damasiolsquos observation that deciding advantageously depends on

the use of affective cues in both learning and deciding (Bechara et al 1997 Damasio 1994)

There is increasing evidence that humans are naturally proficient in the ability to acquire

expertise and that encapsulation of experience in expert intuition and perception via system one

provides a means of by-passing cognitive limits (Ericsson 2006) The nature of expertise could

counteract the inherent environmental uncertainties that Tiedens and Linton (2001) identified as

leading to more conscious appraisal of information While not an unequivocal result our finding

of greater critical engagement among higher performing traders with intuitions and their more

sophisticated deployment of intuition in combination with analysis suggests an important

direction for future research

The small number of accounts of traders monitoring their own emotions as a source of

information about the emotions of other market actors was intriguing These data suggest a

28

possibly productive avenue for future research We do not have evidence of performance

outcomes of predictive uses of empathy in this manner but our findings are consistent with

arguments that the evolution of the human brain has been significantly driven by the need to

predict the behavior of other humans often via subtle cues (eg Nicholson 2000)

We suggest that the identification of links between decision-making performance and

emotion regulation in this study has important implications for theory development in two key

fields First while somewhat tacit in much of the literature the implication of many claims in the

decision-making and behavioral finance literatures is that a range of key decision-making biases

are underpinned by mechanisms which involve emotion processes One relevant explicit example

is Thalerlsquos (1985 1999) account of the role of hedonic editinglsquo in mental accounting and the

disposition effect (the tendency to hold losing assets longer than winning assets) This explains

key biases in terms of the desire to maintain positive hedonic tone There is evidence too of

interpersonal variation in propensity to exhibit such biases for example investors vary in their

propensity to exhibit the disposition effect (Shapira amp Venezia 2001 Weber amp Welfens 2008)

In this study we have seen that traders seek to regulate emotions in order to avoid decision biases

and that higher performing traders typically exhibit more sophisticated emotion regulation

strategies This suggests that it would be productive to investigate the role of emotion regulation

as one key source of interpersonal variation in susceptibility to a range of decision biases

A second implication concerns the role of emotion in expert performance While much

attention has been paid to the nature of cognition in expert performance the expertise literature

hardly considers the role of emotion For example examining the index of the Cambridge

Handbook of Expertise and Expert Performance (Ericsson et al 2006) reveals very few

references to emotion and these are peripheral to the main arguments of the chapters which

contain them Our research suggests first that effective emotion regulation may be an important

29

facet of expert performance and second that greater attention should be paid to the interactions

between emotion emotion regulation and expert intuition Further research could test the

proposition that effective expert intuition is reduced by reliance on defensive emotion regulation

strategies

While our study points to the importance of intuition in traderslsquo work it may be that the

relative importance of intuition and analysis vary with task characteristics such as time span of

decision-making Certainly this seemed to be the view of several senior managers with

responsibility for allocating traders to trading roles The interplay that expert traders described

between intuition and analysis is also intriguing The importance of context to the role of affect

in decision-making has been noted in prior research (Forgas amp George 2001) Further research

could usefully explore this aspect of traderslsquo expertise

This study also contains some potentially important implications for practice First it

points to the importance of learned strategies for emotion regulation and the need for effective

support for their development Second our data directly and indirectly point to the key role of

management in this process Our findings suggest that there may be considerable benefits to

skilled managerial interventions that help to steer effective emotion regulation and support

inexperienced traders in developing emotion regulation skills Additionally managers may be

able to help traders to understand the productive role that critically engaged experience-based

intuition may play in decision-making Our evidence suggests that many high performing traders

deploy a reflective and critical approach to the use and development of intuition well-founded in

experience Managers could help to guide this process through coaching The contextual

dependence of high quality intuitions suggests they are quite domain specific and may not

transfer across contexts As several informants told us this is especially true for traders operating

under different market conditions

30

We heard repeated concerns from senior managers who worried about traders who had

not seen a bear market and would not operate well when that occurred We also heard many

stories of people transferring between trading areas and needing time to re-contextualize

expertise before their intuitions could be considered reliable Thus managers have a role in

helping traders to extend the boundaries of their expertise Given recent events in financial

markets our findings may be relevant to an understanding of how traders react under massively

changed trading conditions and how those reactions might either contribute to or result from

market volatility

This research has some important limitations First although we have argued for the

importance of an account of emotion that includes the experience of emotion as Pham (2004

368) notes the affective system is focused on the present Thus people can be poor at recalling or

predicting emotions There are limits to the human capacity to introspect on emotion processes

and to recall the experience of emotion These limits are also subject to wide individual

differences The capacity for introspection and recall will also vary between individuals For this

reason studies such as ours need to be complemented with more physiologically based research

as well as further qualitative and quantitative studies

Second as in all work contexts traders subscribe to norms of socially sanctioned

behavior and to common narratives about the nature of their work We have not treated emotional

labor as a primary component of traderslsquo work and performance The majority of work

interactions are carried out through highly abbreviated electronic exchanges which provide a poor

medium for the communication of emotion However there is a sense in which traders engage in

emotional labor since especially for novices there are social pressures to comply with display

rules which emphasize the avoidance of displays of strong emotion One common narrative

thread that ran though many traderslsquo accounts of their work was a representation of trading work

31

as principally concerned with rational analysis from which emotions are a dangerous distraction

This narrative seemed particularly strong in the accounts of less experienced traders Although as

we have seen the mask would often slip as they discussed their work Some traderslsquo accounts

were clearly colored by a desire to conform to this mode of self-presentation In consequence it is

possible that in our interviews and during data analysis we were at times unable to distinguish

effectively between defensive denial of emotion and effective regulation of emotion This would

be another avenue for future research

To conclude we know that emotions are a rich source of experience in everyday life but

at the same time in work contexts they can be a source of vulnerability a wayward influence over

judgment and a source of disturbance to process The more ―rational-economic such

environments are the more likely we are to hold such beliefs (Nicholson 2000) Our research

illustrates that this position is false or at best short-sighted In the hyper-rational world of

trading in financial markets we did find some evidence that emotions disturbed performance but

mostly among the inexperienced and un-reflective traders The best traders are able to regulate

emotions effectively and incorporate relevant emotions as information ndash signals or a kind of

radar that contain information about risks what is going on in the minds of others and the weight

and relevance to be accorded to onelsquos own past experience

32

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Bargh J A Chen M amp Burrows L (1996) Automaticity of social behavior Direct effects of

trait construct and stereotype activation on action Journal of Personality and Social

Psychology 71 230-244

Baumeister R F Bratslavsky E Muraven M amp Tice D M (1998) Ego depletion Is the

active self a limited resource Journal of Personality and Social Psychology 74 1252-

1265

Bechara A Damasio A Tranel D amp Damasio A R (1997) Deciding advantageously before

knowing the advantageous strategy Science 275 1293-1295

Bower G H (1981) Mood and memory American Psychologist 36 129 ndash 148

Bower G H (1991) Mood congruity of social judgments In J P Forgas (Ed) Emotion and

social judgments (pp 31ndash53) Oxford Pergamon Press

Braun V amp Clarke V (2006) Using thematic analysis in psychology Qualitative Research in

Psychology 3(2) 77-101

Buck R (1999) The biological affects a typology Psychological Reveiw 106 301-336

Damasio A R (1994) Descartes‟ error Emotion reason and the human brain New York

Putnam

Dane E amp Pratt M G (2007) Exploring intuition and its role in managerial decision making

The Academy of Management Review 32 33-54

De Bondt W Palm F amp Wolff C (2004) Introduction to the special issue on behavioral

finance Journal of Empirical Finance 11 423-427

Dreyfus H amp Dreyfus S (2005) Expertise in real world contexts Organization Studies 26

779-792

Epstein S Pacini R Denes-Raj V amp Heier H (1996) Individual differences in intuitive-

experiential and analytical-rational thinking styles Journal of Personality and Social

Psychology 71 390-405

Ericsson K A Krampe R T amp Tesch-Roemer C (1993) The role of deliberate practice in the

acquisition of expert performance Psychological Review 100 363-406

Ericsson K A (2006) An introduction to the Cambridge Handbook of Expertise and Expert

Performance its development organization and content In K A Ericsson amp N Charness

amp P J Feltovich amp R R Hoffman (Eds) The Cambridge Handbook of Expertise and

Expert Performance 1st ed 3-20 Cambridge Cambridge University Press

Fama E F (1991) Efficient Capital Markets II The Journal of Finance 46 1575-1617

Fama E F (1998) Market efficiency long-term returns and behavioral finance Journal of

Financial Economics Vol 49 283-306

Fenton-OCreevy M Nicholson N Soane E amp Willman P (2005) Traders Risks Decisions

and Management in Financial Markets Oxford Oxford University Press

Finucane M L Alhakami A Slovic P amp Johnson S M (2000) The affect heuristic in

judgments of risks and benefits Journal of Behavioral Decision Making 13(1) 1-17

Forgas JP amp George JM (2001) Affective influences on judgments and behavior in

organizations An information processing perspective Organizational Behavior and

Human Decision Processes 86(1) 3-34

Grandey AA (2000) Emotion Regulation in the Workplace A new way to conceptualize

Emotional Labor Journal of Occupational Health Psychology 5(1) 95-110

33

Grandey A A (2003) When the show must go on surface acting and deep acting as

determinants of emotional exhaustion and peer-rated service delivery Academy of

Management Journal 46 86-96

Gray JA (1999) Cognition emotion conscious experience and the brain In T Dalgleish and

MJ Power (Eds) Handbook of Cognition and Emotion (pp83-102) Chichester England

Wiley

Gross J (2002) Emotion regulation affective cognitive and social consequences

Psychophysiology 39 281

Gross J J amp John O P (2003) Individual differences in two emotion regulation processes

Implications for affect relationships and well-being Journal of Personality and Social

Psychology 85(2) 348-362

Gross J J amp Thompson R A (2007) Emotion regulation Conceptual foundations In J J

Gross (Ed) Handbook of emotion regulation New York NY Guilford Press

Isen A M Shalker T E Clark M amp Karp L (1978) Affect accessibility of material in

memory and behavior A cognitive loop Journal of Personality and Social Psychology

36 1-12

Johnson E amp Tversky A (1983) Affect generalization and the perception of risk Journal of

Personality and Social Psychology 45(1) 20-31

Kavanaugh D amp Bower G (1985) Mood and self-efficacy Impact of job and sadness on

perceived capabilities Cognitive Therapy and Research 9 507-525

Klein G A Calderwood R amp Clinton Cirocco A (1986) Rapid decision-making on the

fireground Human Factors and Ergonomics Society 30th Annual Meeting Vol 1 576-

580

Knorr-Cetina K amp Brugger U (2002) Traders Engagement with Markets A Postsocial

Relationship Theory Culture and Society 19(5-6) 161-185

Labouvie-Vief G (2003) Dynamic integration Affect cognition and the self in adulthood

Current Directions in Psychological Science 12 201-206

Lerner J S amp Keltner D (2001) Fear anger and risk Journal of Personality and Social

Psychology 81(1) 146-159

Lerner J S Small D A amp Loewenstein G (2004) Heart strings and purse strings Carryover

effects of emotions on economic decisions Psychological Science 15(5) 337-341

Lo A Repin D amp Steenbarger B (2005) Fear and greed in financial markets A clinical study

of day traders American Economic Review 95 352-359

Lo A W amp Repin D V (2002) The Psychophysiology of Real-Time Financial Risk

Processing Journal of Cognitive Neuroscience 14 323-339

MacKenzie D (2006) An Engine Not A Camera How Financial Models Shape Markets

Cambridge Mass MIT Press

Mayer JD amp Hanson A (1995) Mood-congruent judgment over time Personality and Social

Psychology Bulletin 21 237-244

Mayer JD DiPaolo M and Salovey P (1990) Perceiving affective content in ambiguous

visual stimuli a component of emotional intelligence Journal of Personality Assessment

54 772-781

Miller G (2003) The cognitive revolution a historical perspective Trends in Cognitive Science

7 141

Muraven M amp Baumeister R F (2000) Self-regulation and depletion of limited resources

Does self-control resemble a muscle Psychological Bulletin 126 247-259

Nicholson N (2000) Managing the Human Animal London ThomsonTexere

34

Peterson R L (2007) Affect and financial decision-making How neuroscience can inform

market participants The Journal of Behavioral Finance 8(2) 70-78

Pham M T (2004) The logic of feeling Journal of Consumer Psychology 14 360-369

Phelps E A (2006) Emotion and cognition Insights from studies of the human amygdala

Annual Review of Psychology 57 27-53

Sayer A (1997) Essentialism social constructionism and beyond The Sociological Review 45

453-487

Shapira Z amp Venezia I (2001) Patterns of behavior of professionally managed and

independent investors Journal of Banking and Finance 25 1573ndash1587

Schunk D amp Betsch C (2006) Explaining the heterogeneity in utility functions by individual

differences in decision modes Journal of Economic Psychology 27 386-401

Schwager J D (1993) Market Wizards Interviews with Top Traders New York Collins

Schwarz N amp Clore G L (1983) Mood misattribution and judgments of well-being

Informative and directive functions of affective states Journal of Personality and Social

Psychology 45 513-523

Seo M G Barrett L F amp Bartunek J M (2004) The role of affective experience in work

motivation Academy of Management Review 29 423-439

Seo M G amp Barrett L F (2007) Being emotional during decision makingmdashgood or bad An

empirical investigation The Academy of Management Journal 50 923-940

Shefrin H (2000) Beyond Greed and Fear Understanding Behavioral Finance and the

Psychology of Investing Boston MA Harvard Business School Press

Stokes A F Kemper K amp Kite K (1997) Aeronautical decision making cue recognition and

expertise under time pressure In C E Zsambok amp G Klein (Eds) Naturalistic Decision

Making pp 183-196 Mahwah NJ Erlbaum

Tamir M (2005) Dont worry be happy Neuroticism trait-consistent affect regulation

and performance Journal of Personality and Social Psychology 89 (3) 449 ndash

461

Thaler R H (1985) Mental accounting and consumer choice Marketing Science 4(3) 199-214

Thaler R H (1993) Advances In Behavioral Finance New York Russel Sage Foundation

Thaler R H (1999) Mental accounting matters Journal of Behavioral Decision Making 12(3)

183-206

Tiedens L amp Linton S (2001) Judgment under emotional certainty and uncertainty the effects

of specific emotions on information processing Journal of Personality and Social

Psychology 81(6) 973-988

Todd P M amp Gigerenzer G (2007) Environments that make us smart Ecological rationality

Current Directions in Psychological Science 16 167-171

Totterdell P Briner R B Parkinson B amp Reynolds S (1996) Fingerprinting time series

dynamic patterns in self-report and performance measures uncovered by a graphical non-

linear method British Journal of Psychology 87(1) 43-60

Weber M amp Welfens F (2008) Splitting the Disposition Effect Asymmetric Reactions

Towards bdquoSelling winners‟ and bdquoHolding Losers‟ Working Paper University of

Mannheim

Wright WF amp Bower GH (1992) Mood effects on subjective probability assessment

Organizational Behavior and Human Decision Processes 52 276ndash91

10

simplification However the model usefully illustrates the central role of emotion regulation in

decision-making

In addition to theoretical modeling there is empirical evidence for a relationship between

strategies for emotion regulation and a range of important outcomes Recent research has paid

particular attention to the difference in outcomes between antecedent-focused emotion regulation

strategies which seek to change emotions before emotion responses have become fully activated

and response-focused regulation strategies which modify behavior and emotion expression once

the emotion response is underway Emotion regulation strategies have been shown to have

differential effects on outcomes including cognitive performance health and qualities of social

interaction (Gross and Thompson 2007) In the domain of work performance much attention has

focused on the emotional labor required by customer service interactions Here emotion

regulation has been characterized as a process of deep and surface acting Surface acting is the

faking of emotion display to accord with organization display rules Deep acting involves

modifying inner feelings Grandey (2000) considers emotional labor as a subset of emotion

regulation and equates antecedent-focused and response-focused regulation with deep and surface

acting respectively In a study of front-line service workers Grandey (2003) found antecedent-

focused emotion regulation was associated with greater effectiveness in relating to customers in a

warm friendly manner while response-focused emotion regulation was associated with emotional

exhaustion and greater tendency to break character and reveal negative emotions in a service

encounter This result supports Grosslsquos earlier work (2002) There is also some evidence on

emotion regulation and financial decision-making Seo and Barret (2007) found that investors

who were better able to identify and discriminate among their current feelings achieved superior

decision-making performance They argued that this relationship was mediated by effective

regulation of the influence of feelings on their decision-making

11

In the present study we go beyond the study of emotion regulation in a context of work

performance that depends primarily on social interaction In contrast to emotional labor studies

which focus on the context of interpersonal interaction most trading nowadays (and in all cases

we studied) is conducted electronically via computer or through highly abbreviated and

formalized electronic messages with counterparties Rather than depending on appropriate

emotion display in the context of customer interaction or negotiating with counterparties trader

performance depends on selecting optimal trading strategies in the face of complex cognitive

demands and the need to process significant amounts of information with uncertain relevance

(Knorr-Cetina amp Bruegger 2002) We now turn to the present study

THE STUDY AND METHODS

The data reported in this paper were collected as part of a large multifaceted study of the

role and behavior of traders working in investment banks For this paper we have returned to this

data corpus to examine the considerable amount that traders told us about their work and

emotion an aspect touched on only superficially in previous analysis of this data (see Fenton-

OCreevy Nicholson Soane and Willman 2005 for an extended account of the study)

Participants

Participants were sampled from four leading investment banks with offices in the City of

London Three banks were American and one was European Managers in each organization were

asked to select a representative sample of traders from a range of markets trading in stocks

bonds and derivatives The mean age of participants was 3281 years (sd = 491) There was

variation in traderslsquo experience with overall tenure (including time with previous employers) in a

range from 6 months to 30 years and a mean job tenure of 780 years (sd = 558) The trader

sample comprised 116 men (983) and 2 women (17) The participants were traders in

equities bonds and derivatives most engaged in either market making or proprietary trading or

12

both We gathered information on individual trader characteristics and performance and carried

out semi-structured interviews with each trader and with a further 10 senior managers Where

traders were also managers we interviewed them twice once as a trader and once as a manager

Data

Qualitative data Interviews lasted between 30 and 90 minutes They were recorded and

transcribed in full The interviews ranged over multiple aspects of the traderslsquo roles and work

The data set for this study consisted of the portions of the interviews relevant to the role of

feelings in traderslsquo work and decision making Traders were asked to describe the range of

emotions they experienced during trading Follow-up questions encouraged them to explore the

long-term and short-term effects of emotions on their decision making and trading strategy the

role of intuition in their trading and the impact of emotions on performance Managers were

asked to describe how they evaluated and managed trader performance Again this often

produced talk about traderslsquo feelings and how they were managed

Performance data Hard performance data for traders are difficult to obtain Measures

such as value at risk trading outcomes and profit and loss are highly confidential in this setting

and were not available to us so we used total remuneration as our measure of trader performance

We felt this to be a reasonable proxy for decision-performance since a high proportion of total

remuneration is a variable annual performance linked bonus and the non-bonus elements tend to

reflect longer term financial performance in this very performance oriented sector We have

treated this variable as an indicator of expertise which Ericsson (2006) defines as reliably

superior performancelsquo Traders were asked to state their income including bonus in terms of

four categories (1 pound50000 - pound99999 (N = 4) 2 pound100000 to pound299999 (N = 41) 3 pound300000-

pound499999 (N = 34) 4 more than pound500000(N = 38) One trader declined to provide this

information

13

Analysis

The raw data were the full transcripts of all interviews We used a thematic analysis

approach which we judged to be particularly well suited to the present study As Braun and

Clarke (2006 78) note thematic analysis does not rest on a single epistemic position but can

span both realist and constructivist approaches We take the position that emotions have both a

measurable biological reality and exist in the realm of socially constructed personal experience in

which emotions have personal and social meaning

Data were open-coded by each author separately then in discussion using the NVIVO

program Common statements were identified and used as the basis for a first set of coding

categories which were subsequently refined and consolidated Coding categories were thus both

emergent from the interviews and drew on constructs identified in the literature (eg approaches

to emotion regulation) relevant to emerging themes Thus coding was both theoretical and

inductive As we analyzed the data and drew tentative conclusions we explicitly sought

disconfirming evidence to test the robustness of our insights In a later stage of analysis we

partitioned the sample into groups of low (lt5 years n=25) medium (5 to 10 years n=48) and

high experience (gt10 years N=45) and into groups of low (remunerationlt pound300k N=45) medium

(pound300k- pound500k N=34) and high expertise (gt pound500k N=38) We compare interview responses of

three specific groups inexperienced low paid traders (N=18) highly experienced but low paid

traders (N=15) and high paid traders (N=38) The remainder of the sample were medium

experience and pay There were no low experience high pay traders We chose the three

comparison groups to provide maximal contrast in differentiating the characteristics associated

with different levels of experience and expertise respectively

14

In Table 1 we summarize our key findings and the nature of the evidence for each finding

In the final column we note our sense of the strength of the evidence for each finding This

represents a qualitative conclusion arrived at though discussion between the authors and drawing

on quantity consistency importance and clarity of supporting data and existence of any

disconfirming evidence In the next section of the paper we discuss these findings and the

evidence for them in more detail Direct quotes are verbatim accompanied by the case number of

the respondent and their classification in terms of experience and pay level

TABLE 1 ABOUT HERE

TRADERSrsquo UNDERSTANDINGS OF EMOTION IN THEIR TRADING PRACTICE

Emotional experience and regulation

For many traders especially the less experienced trading is marked by significant and

persistent emotional responses to successes and setbacks It is relevant to note the distinction

between mood and emotion since both were relevant to traders Mood can be understood as a

relatively diffuse emotional climate which persists over time and not anchored to specific

situations or cognitions In contrast emotions typically have specific objects and give rise to

behavioral response tendencies relevant to those objects (Totterdell Briner et al 1996)

ldquoWhen you lose money you could sit down and cry Anybody who says you couldn‟t

isn‟t being honest with you Of course when it‟s good it‟s fantastic The highs and

lows of a trader‟s life are euphoria or absolute dismayrdquo 106 high experience

medium pay

While these emotional responses would often be triggered by specific events or series of

events in many cases the impact on mood would persist for significant periods with

consequences for subsequent trading behavior For example one manager described a trader

15

working for him as ―having been in the wilderness his confidence totally shattered for about

two years before slowly recovering from a string of losses Many talked about needing weeks or

even months to recover from the impact of major losses especially early in their careers Others

talked about the dangers of false confidence or euphoria which could persist for some time after a

big win

ldquoPeople get a bit arrogant when they have good times but this can be dangerous

because then they stop thinking as muchrdquo 18 medium experience medium pay

ldquoI tend to feel more cautious when losing moneyhellipIf I am having a down month I‟ll

look at trades which I would do if I was having a good month and say I don‟t like it

enough to take the risk on it I become more selective more risk averse and to do a

trade I need to see more than one reason why a trade will work and then might put it

on but not in a huge size When making money I can be more slack 29 high

experience high pay

However our data also suggest emotion regulation is critical to moderating the impact of

emotions on traderslsquo decision making Senior traders and trader managers frequently talked about

the way in which they had developed a capacity to regulate their own emotions and trade more

evenly regardless of success and setbacks

ldquoYou learn to be able to deal with emotions It doesn‟t get to me as much There

were situations when I was extremely stressed up and then you feel physically ill and

you really feel on the verge of throwing up But that was a long time ago and doesn‟t

happen so much now You have seen the ups and downs more You have experienced

them and in a way you are probably more prepared for it and you are aware that

every now and then it will happenhellip but it doesn‟t get to you all that much because

you are aware that it will happen 6 medium experience high pay

16

We examined emotion regulation and its relevance to performance further by considering

data from the three comparison groups (based on experience and pay) We noticed some

important differences in the way in which these groups discussed the interaction between

emotion trading and the use of intuition First there seemed to be notable differences in the

strategies employed for emotion regulation which we describe below in the language of the

Gross and Thompson model (2007) When asked directly about emotion traders in the low

experience group typically started by presenting themselves as fairly immune to the impact of

emotion on their trading However as the interview progressed they would often reveal rather

more vulnerability to emotions than they had claimed initially Take for example this trader who

had been trading for a little less than 4 years -

ldquoI‟m bit of a cold fish I don‟t think emotions greatly affect my decision-making If

you are making money you are achieving your objectivehellip

[But later]

hellipWhen you lose money it can be horrendous violent mood swings You don‟t know

what to do when you lose moneyrdquo 38 low experience low pay

There tended to be two responses types when these traders did talk about their emotions

Some in the low experience low pay group did not talk at all about actively managing their

emotions Others talked about removing themselves from situations when their emotions became

a problem (situation modification) or avoiding situations entirely which make them feel bad

(situation selection)

ldquoI think there is a strong emotional element to trading I think that anyone who‟s

doing it properly and has got their head screwed on is doing everything they can

consciously to overrule that and if I feel that I‟m trading emotionally I will walk off

17

the desk have a glass of water walk up and down the street and then come back and

make decisions when I‟m hopefully not emotionalrdquo 43 low experience low pay

Traders in the experienced group more commonly talked about strategies for emotion

regulation However the nature of these strategies tended to vary between the low paid and high

paid groups In the high experience low paid group traders seemed to find it hard to articulate

how they managed their emotions and the emotion regulation strategies they identified were

predominately situation avoidance situation modification and response modulation

ldquoIf you get two or three decisions wrong you find you might not take a risk for a

month until you build up your confidence There‟s definitely a lot of confidence

involvedrdquo 104 high experience low pay

ldquoI try and keep my emotions under tight controlrdquo 105 high experience low pay

There is a marked contrast in the discourse of the high performing traders who often

showed a greater willingness to reflect on their emotion-driven behavior (the two exceptions to

this were traders with whom we had only short interviews with little opportunity for extended

reflection rather than any denial of the role of emotion) Emotion regulation for these traders

tended to focus mainly on how they directed their attention (attentional deployment) and how

they framed experiences of loss and gain (cognitive change)

ldquoBig losses and big gains can swap around fairly quickly and once you understand

that then you stop concentrating on the loss and you start concentrating more on how

to make money back hellip One big trade is not going to make anyone and one big loss

doesn‟t destroy yourdquo 15 high experience high pay

ldquoExperience definitely helps having traded through the crash etc Youve seen

different scenarios and newer people its like oh my god its the end of the world

whereas there is life after death and so I think that type of experience helps It doesnt

18

necessarily help the new situation on what to do but it just helps your judgmentrdquo 55

high experience high pay

There was a notable absence of avoidant behavior in this group Several participants told

stories which implied a significant degree of persistence in the face of negative emotion

ldquoI had one very bad year from which I learned quite a lot I learned that the

overshooting can go on for a very long time it can be very painful you can hit risk

limits hellip I did not want to get out of the trades so kept the trades and then next year

they made more money than they lost I don‟t think I panicked but I was getting calls

from the CEO Reason prevailed in the end Emotionally it was not easy to cope

with There were times when the desk was down close to $100m I lost almost that

much in days I was under a lot of pressure from New York because they did not

understand my positions but in the end we managed to keep the positions and made

money the next year The hardest thing was persuading others that I had a good

traderdquo 14 high experience high pay

This willingness among some of the high performing traders to experience negative

emotion in order to achieve longer term goals is consistent with Labouvie-Vieflsquos (2003)

argument that positive self-development requires not just strategies to optimize positive affect

but also the ability to tolerate tension and negativity to achieve long term goals

However there may be another important reason why response modulation strategies are

maladaptive for traders As we have seen above while poorly regulated emotions carry over to

subsequent trading and risk biasing subsequent trading behavior emotion cues generated by

reactions to information relevant to current trading under time constraints play an important role

in guiding attention and rapidly choosing appropriate action Both poor regulation of non-

19

relevant emotions and recourse to the attempted suppression of all feeling run the risk of masking

these important cues

The Role of Managers in Emotion Regulation

Further evidence of the importance of emotions and their regulation to trader performance

came from interviews with trader managers A few managers described their role in primarily

technical terms focusing on risk management and personal supervision of problematic trades

However many of those we interviewed clearly saw regulating the emotions of traders who

worked for them as a key element in managing trader performance

ldquoI have to play the role of director of emotions in the sense that when they are down

you have to boost their morale and when they are too excited they want to do stupid

things I have to cool them downrdquo 119 senior manager

ldquoI care deeply because I have tremendous pride in the people herehellipThe stress is

generated by fear entirely and it‟s fear of what I guess everyone has their

insecurities whether it‟s being fired losing lots of money and appearing stupid in

front of their peer group Whatever it is it‟s definitely fear and if you can take the

fear out of the situation they perform betterrdquo 123 senior trader manager high

experience high pay

Many traders described such episodes of managerial intervention as crucial to their

learning and development For example-

ldquoI lost $1m in the first 10 days of the year This was at a time when if you made $1m

in a year that was huge I was devastated and my boss asked me for lunch at the

weekend - I thought that was the end of my career My boss said bdquoa lot of the guys

think you‟re OK but they are worried you are going to be afraid to trade that you‟re

20

going to be gun shy and lose your confidence We want you to know that we like you

and if you think you‟ve got to buy them buy them and if you‟ve got to sell them sell

them but whatever you do don‟t stop trading‟ So that was a huge relief Since then I

don‟t get too depressed about losing money although there are always good days

and bad daysrdquo 25 low experience medium performance

Other managers clearly gave thought to the relative strengths and weaknesses of more

intuitive versus more analytical traders in their decisions about matching traders to roles -

ldquoA gut trader should trade a liquid market - he might change his feel so he needs to

get out The analytical trader who thinks much more about what he‟s doing will

change their mind less often and trade with a different time frame A gut trader can

be bullish in the morning The analytical trader will look at something for a week

and then put on a position - less important to get in and out He doesn‟t need to be in

a liquid market - in an emerging market you need a more analytical traderrdquo 122

Manager

ldquoDerivatives are very quantitative and people think if you have a PhD you will be

very good because you have an understanding of options theory but this is not

always the case and you tend to overlook things Although you can put the

parameters into the model there are still a lot of things which are uncertain

Sometimes adding a more qualitative feel to it ndashbdquoyes that‟s what the model says but

the risk doesn‟t look right‟ hellip I tend to have a mixture of people on the desk - those

who are more quantitative and those who are more common sense or gut instinct

traders Having the blend is quite useful for bouncing ideasrdquo 124 Manager

These reflections have implications for management strategies in trading environments or

indeed any others where the main role of the operative is complex decision-making under

21

constraints of time and uncertain and incomplete information We consider these points further in

our discussion

Emotional Cues and the Use of Intuition

The second broad theme concerned the role of emotional cues in traderslsquo decision-

making Many of the traders discussed this aspect of emotion as intuition Traderslsquo own accounts

and conceptualizations of intuition fit well with Dane and Prattlsquos (200740) definition of intuition

as ―affectively charged judgments that arise through rapid non-conscious and holistic

associations For example -

ldquo[W]ithout a doubt some of the best bargains are the ones you dont do You know

theyre bad bargains You know It‟s a gut feel Youve looked at the playing field and

you just know this is a bad bargainrdquo 106 high experience moderate pay

Some of the traders see a more subtle and sophisticated role for emotions which represent

an unconscious drawing on experience -

ldquoI think many people do say theyre gut-feel traders but perhaps theyre not analyzing

what theyre actually thinking and theyre seeing a lot of customer flow and a lot of

buyers and they probably dont necessarily realize the reasons why they want to buy

But there are very good traders that say theyre trading off gut feel that I believe

actually have probably reasonable information reasonable thoughts behind it but

they wouldnt literally toss a coinrdquo 55 high experience high pay

Feelings are also seen as a kind of radar directing attention and shaping perceptions

around opportunities to enable them to be promptly seized

ldquoI think what a trader has to have is not necessarily this gut feeling but this nose for

opportunities If an opportunity comes along you have to be able to spot it and see it

22

and sometimes people you typically find in this business - an opportunity is there and

they cant see it and then its taken by someone else and its like oh yeah that was a

good idea but it is gonerdquo 58 high experience low pay

Not only do feelings act as a kind of radar directing attention but they do so in a way that

enables rapid decision making under time pressure As one trader noted -

ldquoTrading includes stuff which is beyond trading Trading is when you make decisions

involving financial risk that have two qualities you have to make them in someone

else‟s time schedule not your own and when you make a decision you have to be

confident when you have incomplete or imperfect information and therefore there

must be some kind of intuitive or qualitative elementrdquo 121 high experience high pay

Experienced traders made much more reference to intuition or gut feellsquo as they often

phrased it than less experienced traders However again there were important differences

between low and high paid traders in the high experience group Low paid traders who talked

about the use of intuition often talked of it in terms of a rather mysterious process You either had

a feeling or not For example

ldquoIt‟s almost like a sixth sense Something comes over you and you feel like - yes I

know they‟re going to be looking to buy these later on or looking to sell these later

onrdquo 116 high experience low pay

By contrast the top paid group tended to reflect critically about the origins of their

intuitions and to bring them together with more objective information -

ldquoIf I do fancy a stock - you have a feeling it feels right it has done nothing for like

two or three months and you‟ve seen sellers and they start to dwindle and it is just

stagnant and then you have a look on the charts you refer to the technical side as

well as the emotional side of the trade So you know a combination of technical and

23

emotional as well as what the analyst thinks as well so you sort of bring the

instruments you have available to you to make the decision rather than the snap

[snaps his finger] I fancy buying thatrdquo 101 high experience high pay

ldquoI may examine opportunities based on intuition that something is going to happen

but the decision is based on something I think is rationalrdquo 68 medium experience

high pay

Reported use of intuition does seem to increase with trader experience However traderslsquo

engagement with their feelings is qualitatively different between low and high performers High

performing traders seem to engage with their intuitions at a meta-cognitive level and make

judgments about the relevance of these feelings to the decision at hand This is consistent with

the growing literature on expertise which points to experience as a necessary but insufficient

condition for the development of expertise and points to the role of extended critical engagement

with practice in developing expertise (Ericsson 2006 Ericsson Krampe amp Tesch-Roemer

1993)

Traders were not universally positive about the role of intuition in market decision making

Some believed reliance on such feelings yields poor outcomes -

ldquoMany traders feel that models have been developed by academics who do not know

markets and [traders] think that gut feeling is more important My experience is that

this is 100 wrong and computers can make better decisions than tradersrdquo 37

medium experience medium pay

Overall however the data support a picture of expert traders having a meta-cognitive

engagement with emotion regulation This process entails discrimination between emotions in

terms of their relevance to the decision at hand and effective strategies for emotion regulation to

enhance performance

24

Empathy

The third identified theme was empathy monitoring own emotions as information

about what other market players might be feeling Only five traders explicitly described

using their own capacity for empathy as a decision making tool Although not frequent in

our data these examples are important illustrating that there is a path for traders beyond

simply seeking to eliminate or reduce the intensity of their emotions These traders

fostered feelings as a source of information about other market actors which they managed

and used in a self-aware analysis One trader described using his own fear as an indicator

of fear in the market Another described actively imagining the feelings of other market

actors ―trying to put myself in [the Bank of England Governorlsquos] feet to develop a feel for

how he feels and thinks 14 high experience high pay

Three traders talked about an emotional affinity with the feelings of people in

national markets (Spain 34 high experience medium pay Italy 70 medium experience

low pay and Japan 117 high experience medium pay) with whom they shared a common

culture and propensity to react emotionally in similar ways to the same market events This

group was small but these data broaden the picture of traders reasoning with emotionlsquo

and offer a potentially rich and fruitful avenue for future research

DISCUSSION AND CONCLUSIONS

To ask whether emotion disturbs or aids traderslsquo decision-making is to ask the wrong

question Traderslsquo emotions and cognition are inextricably linked Therefore a more productive

question to ask in this context is whether there are more or less effective strategies for managing

and using emotion in financial decision-making This has been the thrust of our analysis which

25

sought to move beyond previous work that simply characterizes emotional arousal as detrimental

to performance (eg Lo et al 2005 Schunk and Bersh 2006) The study contributes to our

understanding of the role of emotions in work and decision-making in several distinct ways In

contributing to our understanding of the role of emotion at work this study has particular

relevance in that it considers a work domain which has been theorized as strongly normatively

rational as opposed to a work domain (such as negotiation or customer service) where

performance is primarily dependent on effective social interaction However it is clear from this

study that even within such an analysis-intensive domain as financial trading emotion plays a

central role Traders and their managers are frequently preoccupied with the effective regulation

and use of emotions in their work Our work points to the value of a more nuanced understanding

which considers the role of emotions in decision-making the differential impact of various

emotion regulation strategies the conditions under which gut-feellsquo may support effective

decision-making and the role of empathic responses in understanding the behavior of other

market actors

Effective emotion regulation seems to be a critical success factor in trading for our

findings suggest that the strategies for emotion regulation adopted by expert higher performing

traders are qualitatively different from those of lower performing traders In particular higher

performers are more inclined to regulate emotions through attentional deployment and cognitive

change and may display a willingness to cope with negative feelings in the interests of

maintaining objectivity and pursuing longer term goals The kind of attention and appraisal-

focused emotion regulation strategies used by high-performing traders do not seem to be too

cognitively expensive and are effective in reducing negative experience of emotion (Gross

2002) By contrast less expert traders engage either in avoidant behaviors such as walking

away from the desk or invest significant cognitive effort in modulating their emotional

26

responses This extends previous findings (eg Grandey 2003) concerning the performance

benefits of antecedent versus response-focused emotion regulation in the context of emotion

labor to the very different context of financial decision-making Our findings also suggest that

willingness to endure negative feelings in pursuit of long-term goals may be more adaptive than

purely defensive strategies aimed at maintaining positive feelings (Labouvie-Vief 2003 Tamir

2005)

This study also provides evidence that more effective emotion regulation strategies can be

learned in a financial decision-making context While an individuallsquos preferred approach to

emotion regulation is likely to be influenced by personality traits neuroticism and extroversion in

particular (Gross amp John 2003) our interviews with traders and their managers also point to the

importance of traderslsquo learned strategies for emotion regulation Importantly our study also

suggests that defensive emotion regulation strategies may be problematic because they reduce

opportunities to exercise expert intuition

These findings go well beyond prior research on emotion regulation and performance

(eg Grandey 2003) which has a primary focus on performance in the context of interpersonal

interaction Our findings uniquely address the performance of professional traders for whom

performance is not primarily dependent on interpersonal interaction and which has been

theorized as strongly rational involving the selection of optimal strategies in the face of complex

cognitive demands and requiring attention to a large volume of information with uncertain

relevance

Turning to intuition traders in our study mirror the balance of opinion in the research

literature on intuition They are equivocal about whether feelings and hunches about appropriate

courses of action lead to better or worse outcomes than purely rational analysis There were

strong feelings on both sides with traders being quite evenly divided between the two camps

27

However again our study suggests the importance of a more nuanced approach than simply

asking whether reliance on intuition is good or bad and points towards the conditions in which

reliance on intuitive judgment may be more and less effective The findings suggest that one

characteristic of higher performing traders may be a greater willingness to reflect critically about

their intuitions and feelings about trading These traders often reported relying on intuition but

they tend to weigh their feelings critically alongside other evidence and to reflect about the

provenance of those feelings Lower performing traders may rely on feelings alone and show

less propensity to think critically about the source of hunches This reflection by expert traders

about the provenance of feelings may be particularly salient given Schwarz and Clorelsquos (1983

2003) finding that the impact of emotions on behavior is reduced or disappears when the

relevance of those emotions is explicitly called into question

That traderslsquo reliance on affective cues in decision-making can support effective

performance is consistent with Damasiolsquos observation that deciding advantageously depends on

the use of affective cues in both learning and deciding (Bechara et al 1997 Damasio 1994)

There is increasing evidence that humans are naturally proficient in the ability to acquire

expertise and that encapsulation of experience in expert intuition and perception via system one

provides a means of by-passing cognitive limits (Ericsson 2006) The nature of expertise could

counteract the inherent environmental uncertainties that Tiedens and Linton (2001) identified as

leading to more conscious appraisal of information While not an unequivocal result our finding

of greater critical engagement among higher performing traders with intuitions and their more

sophisticated deployment of intuition in combination with analysis suggests an important

direction for future research

The small number of accounts of traders monitoring their own emotions as a source of

information about the emotions of other market actors was intriguing These data suggest a

28

possibly productive avenue for future research We do not have evidence of performance

outcomes of predictive uses of empathy in this manner but our findings are consistent with

arguments that the evolution of the human brain has been significantly driven by the need to

predict the behavior of other humans often via subtle cues (eg Nicholson 2000)

We suggest that the identification of links between decision-making performance and

emotion regulation in this study has important implications for theory development in two key

fields First while somewhat tacit in much of the literature the implication of many claims in the

decision-making and behavioral finance literatures is that a range of key decision-making biases

are underpinned by mechanisms which involve emotion processes One relevant explicit example

is Thalerlsquos (1985 1999) account of the role of hedonic editinglsquo in mental accounting and the

disposition effect (the tendency to hold losing assets longer than winning assets) This explains

key biases in terms of the desire to maintain positive hedonic tone There is evidence too of

interpersonal variation in propensity to exhibit such biases for example investors vary in their

propensity to exhibit the disposition effect (Shapira amp Venezia 2001 Weber amp Welfens 2008)

In this study we have seen that traders seek to regulate emotions in order to avoid decision biases

and that higher performing traders typically exhibit more sophisticated emotion regulation

strategies This suggests that it would be productive to investigate the role of emotion regulation

as one key source of interpersonal variation in susceptibility to a range of decision biases

A second implication concerns the role of emotion in expert performance While much

attention has been paid to the nature of cognition in expert performance the expertise literature

hardly considers the role of emotion For example examining the index of the Cambridge

Handbook of Expertise and Expert Performance (Ericsson et al 2006) reveals very few

references to emotion and these are peripheral to the main arguments of the chapters which

contain them Our research suggests first that effective emotion regulation may be an important

29

facet of expert performance and second that greater attention should be paid to the interactions

between emotion emotion regulation and expert intuition Further research could test the

proposition that effective expert intuition is reduced by reliance on defensive emotion regulation

strategies

While our study points to the importance of intuition in traderslsquo work it may be that the

relative importance of intuition and analysis vary with task characteristics such as time span of

decision-making Certainly this seemed to be the view of several senior managers with

responsibility for allocating traders to trading roles The interplay that expert traders described

between intuition and analysis is also intriguing The importance of context to the role of affect

in decision-making has been noted in prior research (Forgas amp George 2001) Further research

could usefully explore this aspect of traderslsquo expertise

This study also contains some potentially important implications for practice First it

points to the importance of learned strategies for emotion regulation and the need for effective

support for their development Second our data directly and indirectly point to the key role of

management in this process Our findings suggest that there may be considerable benefits to

skilled managerial interventions that help to steer effective emotion regulation and support

inexperienced traders in developing emotion regulation skills Additionally managers may be

able to help traders to understand the productive role that critically engaged experience-based

intuition may play in decision-making Our evidence suggests that many high performing traders

deploy a reflective and critical approach to the use and development of intuition well-founded in

experience Managers could help to guide this process through coaching The contextual

dependence of high quality intuitions suggests they are quite domain specific and may not

transfer across contexts As several informants told us this is especially true for traders operating

under different market conditions

30

We heard repeated concerns from senior managers who worried about traders who had

not seen a bear market and would not operate well when that occurred We also heard many

stories of people transferring between trading areas and needing time to re-contextualize

expertise before their intuitions could be considered reliable Thus managers have a role in

helping traders to extend the boundaries of their expertise Given recent events in financial

markets our findings may be relevant to an understanding of how traders react under massively

changed trading conditions and how those reactions might either contribute to or result from

market volatility

This research has some important limitations First although we have argued for the

importance of an account of emotion that includes the experience of emotion as Pham (2004

368) notes the affective system is focused on the present Thus people can be poor at recalling or

predicting emotions There are limits to the human capacity to introspect on emotion processes

and to recall the experience of emotion These limits are also subject to wide individual

differences The capacity for introspection and recall will also vary between individuals For this

reason studies such as ours need to be complemented with more physiologically based research

as well as further qualitative and quantitative studies

Second as in all work contexts traders subscribe to norms of socially sanctioned

behavior and to common narratives about the nature of their work We have not treated emotional

labor as a primary component of traderslsquo work and performance The majority of work

interactions are carried out through highly abbreviated electronic exchanges which provide a poor

medium for the communication of emotion However there is a sense in which traders engage in

emotional labor since especially for novices there are social pressures to comply with display

rules which emphasize the avoidance of displays of strong emotion One common narrative

thread that ran though many traderslsquo accounts of their work was a representation of trading work

31

as principally concerned with rational analysis from which emotions are a dangerous distraction

This narrative seemed particularly strong in the accounts of less experienced traders Although as

we have seen the mask would often slip as they discussed their work Some traderslsquo accounts

were clearly colored by a desire to conform to this mode of self-presentation In consequence it is

possible that in our interviews and during data analysis we were at times unable to distinguish

effectively between defensive denial of emotion and effective regulation of emotion This would

be another avenue for future research

To conclude we know that emotions are a rich source of experience in everyday life but

at the same time in work contexts they can be a source of vulnerability a wayward influence over

judgment and a source of disturbance to process The more ―rational-economic such

environments are the more likely we are to hold such beliefs (Nicholson 2000) Our research

illustrates that this position is false or at best short-sighted In the hyper-rational world of

trading in financial markets we did find some evidence that emotions disturbed performance but

mostly among the inexperienced and un-reflective traders The best traders are able to regulate

emotions effectively and incorporate relevant emotions as information ndash signals or a kind of

radar that contain information about risks what is going on in the minds of others and the weight

and relevance to be accorded to onelsquos own past experience

32

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Bechara A Damasio A Tranel D amp Damasio A R (1997) Deciding advantageously before

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Dane E amp Pratt M G (2007) Exploring intuition and its role in managerial decision making

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Finucane M L Alhakami A Slovic P amp Johnson S M (2000) The affect heuristic in

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Forgas JP amp George JM (2001) Affective influences on judgments and behavior in

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Grandey AA (2000) Emotion Regulation in the Workplace A new way to conceptualize

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Gross J (2002) Emotion regulation affective cognitive and social consequences

Psychophysiology 39 281

Gross J J amp John O P (2003) Individual differences in two emotion regulation processes

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Gross J J amp Thompson R A (2007) Emotion regulation Conceptual foundations In J J

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Isen A M Shalker T E Clark M amp Karp L (1978) Affect accessibility of material in

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Johnson E amp Tversky A (1983) Affect generalization and the perception of risk Journal of

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Kavanaugh D amp Bower G (1985) Mood and self-efficacy Impact of job and sadness on

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580

Knorr-Cetina K amp Brugger U (2002) Traders Engagement with Markets A Postsocial

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Labouvie-Vief G (2003) Dynamic integration Affect cognition and the self in adulthood

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Lerner J S amp Keltner D (2001) Fear anger and risk Journal of Personality and Social

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Lerner J S Small D A amp Loewenstein G (2004) Heart strings and purse strings Carryover

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Lo A Repin D amp Steenbarger B (2005) Fear and greed in financial markets A clinical study

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Miller G (2003) The cognitive revolution a historical perspective Trends in Cognitive Science

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Muraven M amp Baumeister R F (2000) Self-regulation and depletion of limited resources

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Nicholson N (2000) Managing the Human Animal London ThomsonTexere

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Peterson R L (2007) Affect and financial decision-making How neuroscience can inform

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Pham M T (2004) The logic of feeling Journal of Consumer Psychology 14 360-369

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Sayer A (1997) Essentialism social constructionism and beyond The Sociological Review 45

453-487

Shapira Z amp Venezia I (2001) Patterns of behavior of professionally managed and

independent investors Journal of Banking and Finance 25 1573ndash1587

Schunk D amp Betsch C (2006) Explaining the heterogeneity in utility functions by individual

differences in decision modes Journal of Economic Psychology 27 386-401

Schwager J D (1993) Market Wizards Interviews with Top Traders New York Collins

Schwarz N amp Clore G L (1983) Mood misattribution and judgments of well-being

Informative and directive functions of affective states Journal of Personality and Social

Psychology 45 513-523

Seo M G Barrett L F amp Bartunek J M (2004) The role of affective experience in work

motivation Academy of Management Review 29 423-439

Seo M G amp Barrett L F (2007) Being emotional during decision makingmdashgood or bad An

empirical investigation The Academy of Management Journal 50 923-940

Shefrin H (2000) Beyond Greed and Fear Understanding Behavioral Finance and the

Psychology of Investing Boston MA Harvard Business School Press

Stokes A F Kemper K amp Kite K (1997) Aeronautical decision making cue recognition and

expertise under time pressure In C E Zsambok amp G Klein (Eds) Naturalistic Decision

Making pp 183-196 Mahwah NJ Erlbaum

Tamir M (2005) Dont worry be happy Neuroticism trait-consistent affect regulation

and performance Journal of Personality and Social Psychology 89 (3) 449 ndash

461

Thaler R H (1985) Mental accounting and consumer choice Marketing Science 4(3) 199-214

Thaler R H (1993) Advances In Behavioral Finance New York Russel Sage Foundation

Thaler R H (1999) Mental accounting matters Journal of Behavioral Decision Making 12(3)

183-206

Tiedens L amp Linton S (2001) Judgment under emotional certainty and uncertainty the effects

of specific emotions on information processing Journal of Personality and Social

Psychology 81(6) 973-988

Todd P M amp Gigerenzer G (2007) Environments that make us smart Ecological rationality

Current Directions in Psychological Science 16 167-171

Totterdell P Briner R B Parkinson B amp Reynolds S (1996) Fingerprinting time series

dynamic patterns in self-report and performance measures uncovered by a graphical non-

linear method British Journal of Psychology 87(1) 43-60

Weber M amp Welfens F (2008) Splitting the Disposition Effect Asymmetric Reactions

Towards bdquoSelling winners‟ and bdquoHolding Losers‟ Working Paper University of

Mannheim

Wright WF amp Bower GH (1992) Mood effects on subjective probability assessment

Organizational Behavior and Human Decision Processes 52 276ndash91

11

In the present study we go beyond the study of emotion regulation in a context of work

performance that depends primarily on social interaction In contrast to emotional labor studies

which focus on the context of interpersonal interaction most trading nowadays (and in all cases

we studied) is conducted electronically via computer or through highly abbreviated and

formalized electronic messages with counterparties Rather than depending on appropriate

emotion display in the context of customer interaction or negotiating with counterparties trader

performance depends on selecting optimal trading strategies in the face of complex cognitive

demands and the need to process significant amounts of information with uncertain relevance

(Knorr-Cetina amp Bruegger 2002) We now turn to the present study

THE STUDY AND METHODS

The data reported in this paper were collected as part of a large multifaceted study of the

role and behavior of traders working in investment banks For this paper we have returned to this

data corpus to examine the considerable amount that traders told us about their work and

emotion an aspect touched on only superficially in previous analysis of this data (see Fenton-

OCreevy Nicholson Soane and Willman 2005 for an extended account of the study)

Participants

Participants were sampled from four leading investment banks with offices in the City of

London Three banks were American and one was European Managers in each organization were

asked to select a representative sample of traders from a range of markets trading in stocks

bonds and derivatives The mean age of participants was 3281 years (sd = 491) There was

variation in traderslsquo experience with overall tenure (including time with previous employers) in a

range from 6 months to 30 years and a mean job tenure of 780 years (sd = 558) The trader

sample comprised 116 men (983) and 2 women (17) The participants were traders in

equities bonds and derivatives most engaged in either market making or proprietary trading or

12

both We gathered information on individual trader characteristics and performance and carried

out semi-structured interviews with each trader and with a further 10 senior managers Where

traders were also managers we interviewed them twice once as a trader and once as a manager

Data

Qualitative data Interviews lasted between 30 and 90 minutes They were recorded and

transcribed in full The interviews ranged over multiple aspects of the traderslsquo roles and work

The data set for this study consisted of the portions of the interviews relevant to the role of

feelings in traderslsquo work and decision making Traders were asked to describe the range of

emotions they experienced during trading Follow-up questions encouraged them to explore the

long-term and short-term effects of emotions on their decision making and trading strategy the

role of intuition in their trading and the impact of emotions on performance Managers were

asked to describe how they evaluated and managed trader performance Again this often

produced talk about traderslsquo feelings and how they were managed

Performance data Hard performance data for traders are difficult to obtain Measures

such as value at risk trading outcomes and profit and loss are highly confidential in this setting

and were not available to us so we used total remuneration as our measure of trader performance

We felt this to be a reasonable proxy for decision-performance since a high proportion of total

remuneration is a variable annual performance linked bonus and the non-bonus elements tend to

reflect longer term financial performance in this very performance oriented sector We have

treated this variable as an indicator of expertise which Ericsson (2006) defines as reliably

superior performancelsquo Traders were asked to state their income including bonus in terms of

four categories (1 pound50000 - pound99999 (N = 4) 2 pound100000 to pound299999 (N = 41) 3 pound300000-

pound499999 (N = 34) 4 more than pound500000(N = 38) One trader declined to provide this

information

13

Analysis

The raw data were the full transcripts of all interviews We used a thematic analysis

approach which we judged to be particularly well suited to the present study As Braun and

Clarke (2006 78) note thematic analysis does not rest on a single epistemic position but can

span both realist and constructivist approaches We take the position that emotions have both a

measurable biological reality and exist in the realm of socially constructed personal experience in

which emotions have personal and social meaning

Data were open-coded by each author separately then in discussion using the NVIVO

program Common statements were identified and used as the basis for a first set of coding

categories which were subsequently refined and consolidated Coding categories were thus both

emergent from the interviews and drew on constructs identified in the literature (eg approaches

to emotion regulation) relevant to emerging themes Thus coding was both theoretical and

inductive As we analyzed the data and drew tentative conclusions we explicitly sought

disconfirming evidence to test the robustness of our insights In a later stage of analysis we

partitioned the sample into groups of low (lt5 years n=25) medium (5 to 10 years n=48) and

high experience (gt10 years N=45) and into groups of low (remunerationlt pound300k N=45) medium

(pound300k- pound500k N=34) and high expertise (gt pound500k N=38) We compare interview responses of

three specific groups inexperienced low paid traders (N=18) highly experienced but low paid

traders (N=15) and high paid traders (N=38) The remainder of the sample were medium

experience and pay There were no low experience high pay traders We chose the three

comparison groups to provide maximal contrast in differentiating the characteristics associated

with different levels of experience and expertise respectively

14

In Table 1 we summarize our key findings and the nature of the evidence for each finding

In the final column we note our sense of the strength of the evidence for each finding This

represents a qualitative conclusion arrived at though discussion between the authors and drawing

on quantity consistency importance and clarity of supporting data and existence of any

disconfirming evidence In the next section of the paper we discuss these findings and the

evidence for them in more detail Direct quotes are verbatim accompanied by the case number of

the respondent and their classification in terms of experience and pay level

TABLE 1 ABOUT HERE

TRADERSrsquo UNDERSTANDINGS OF EMOTION IN THEIR TRADING PRACTICE

Emotional experience and regulation

For many traders especially the less experienced trading is marked by significant and

persistent emotional responses to successes and setbacks It is relevant to note the distinction

between mood and emotion since both were relevant to traders Mood can be understood as a

relatively diffuse emotional climate which persists over time and not anchored to specific

situations or cognitions In contrast emotions typically have specific objects and give rise to

behavioral response tendencies relevant to those objects (Totterdell Briner et al 1996)

ldquoWhen you lose money you could sit down and cry Anybody who says you couldn‟t

isn‟t being honest with you Of course when it‟s good it‟s fantastic The highs and

lows of a trader‟s life are euphoria or absolute dismayrdquo 106 high experience

medium pay

While these emotional responses would often be triggered by specific events or series of

events in many cases the impact on mood would persist for significant periods with

consequences for subsequent trading behavior For example one manager described a trader

15

working for him as ―having been in the wilderness his confidence totally shattered for about

two years before slowly recovering from a string of losses Many talked about needing weeks or

even months to recover from the impact of major losses especially early in their careers Others

talked about the dangers of false confidence or euphoria which could persist for some time after a

big win

ldquoPeople get a bit arrogant when they have good times but this can be dangerous

because then they stop thinking as muchrdquo 18 medium experience medium pay

ldquoI tend to feel more cautious when losing moneyhellipIf I am having a down month I‟ll

look at trades which I would do if I was having a good month and say I don‟t like it

enough to take the risk on it I become more selective more risk averse and to do a

trade I need to see more than one reason why a trade will work and then might put it

on but not in a huge size When making money I can be more slack 29 high

experience high pay

However our data also suggest emotion regulation is critical to moderating the impact of

emotions on traderslsquo decision making Senior traders and trader managers frequently talked about

the way in which they had developed a capacity to regulate their own emotions and trade more

evenly regardless of success and setbacks

ldquoYou learn to be able to deal with emotions It doesn‟t get to me as much There

were situations when I was extremely stressed up and then you feel physically ill and

you really feel on the verge of throwing up But that was a long time ago and doesn‟t

happen so much now You have seen the ups and downs more You have experienced

them and in a way you are probably more prepared for it and you are aware that

every now and then it will happenhellip but it doesn‟t get to you all that much because

you are aware that it will happen 6 medium experience high pay

16

We examined emotion regulation and its relevance to performance further by considering

data from the three comparison groups (based on experience and pay) We noticed some

important differences in the way in which these groups discussed the interaction between

emotion trading and the use of intuition First there seemed to be notable differences in the

strategies employed for emotion regulation which we describe below in the language of the

Gross and Thompson model (2007) When asked directly about emotion traders in the low

experience group typically started by presenting themselves as fairly immune to the impact of

emotion on their trading However as the interview progressed they would often reveal rather

more vulnerability to emotions than they had claimed initially Take for example this trader who

had been trading for a little less than 4 years -

ldquoI‟m bit of a cold fish I don‟t think emotions greatly affect my decision-making If

you are making money you are achieving your objectivehellip

[But later]

hellipWhen you lose money it can be horrendous violent mood swings You don‟t know

what to do when you lose moneyrdquo 38 low experience low pay

There tended to be two responses types when these traders did talk about their emotions

Some in the low experience low pay group did not talk at all about actively managing their

emotions Others talked about removing themselves from situations when their emotions became

a problem (situation modification) or avoiding situations entirely which make them feel bad

(situation selection)

ldquoI think there is a strong emotional element to trading I think that anyone who‟s

doing it properly and has got their head screwed on is doing everything they can

consciously to overrule that and if I feel that I‟m trading emotionally I will walk off

17

the desk have a glass of water walk up and down the street and then come back and

make decisions when I‟m hopefully not emotionalrdquo 43 low experience low pay

Traders in the experienced group more commonly talked about strategies for emotion

regulation However the nature of these strategies tended to vary between the low paid and high

paid groups In the high experience low paid group traders seemed to find it hard to articulate

how they managed their emotions and the emotion regulation strategies they identified were

predominately situation avoidance situation modification and response modulation

ldquoIf you get two or three decisions wrong you find you might not take a risk for a

month until you build up your confidence There‟s definitely a lot of confidence

involvedrdquo 104 high experience low pay

ldquoI try and keep my emotions under tight controlrdquo 105 high experience low pay

There is a marked contrast in the discourse of the high performing traders who often

showed a greater willingness to reflect on their emotion-driven behavior (the two exceptions to

this were traders with whom we had only short interviews with little opportunity for extended

reflection rather than any denial of the role of emotion) Emotion regulation for these traders

tended to focus mainly on how they directed their attention (attentional deployment) and how

they framed experiences of loss and gain (cognitive change)

ldquoBig losses and big gains can swap around fairly quickly and once you understand

that then you stop concentrating on the loss and you start concentrating more on how

to make money back hellip One big trade is not going to make anyone and one big loss

doesn‟t destroy yourdquo 15 high experience high pay

ldquoExperience definitely helps having traded through the crash etc Youve seen

different scenarios and newer people its like oh my god its the end of the world

whereas there is life after death and so I think that type of experience helps It doesnt

18

necessarily help the new situation on what to do but it just helps your judgmentrdquo 55

high experience high pay

There was a notable absence of avoidant behavior in this group Several participants told

stories which implied a significant degree of persistence in the face of negative emotion

ldquoI had one very bad year from which I learned quite a lot I learned that the

overshooting can go on for a very long time it can be very painful you can hit risk

limits hellip I did not want to get out of the trades so kept the trades and then next year

they made more money than they lost I don‟t think I panicked but I was getting calls

from the CEO Reason prevailed in the end Emotionally it was not easy to cope

with There were times when the desk was down close to $100m I lost almost that

much in days I was under a lot of pressure from New York because they did not

understand my positions but in the end we managed to keep the positions and made

money the next year The hardest thing was persuading others that I had a good

traderdquo 14 high experience high pay

This willingness among some of the high performing traders to experience negative

emotion in order to achieve longer term goals is consistent with Labouvie-Vieflsquos (2003)

argument that positive self-development requires not just strategies to optimize positive affect

but also the ability to tolerate tension and negativity to achieve long term goals

However there may be another important reason why response modulation strategies are

maladaptive for traders As we have seen above while poorly regulated emotions carry over to

subsequent trading and risk biasing subsequent trading behavior emotion cues generated by

reactions to information relevant to current trading under time constraints play an important role

in guiding attention and rapidly choosing appropriate action Both poor regulation of non-

19

relevant emotions and recourse to the attempted suppression of all feeling run the risk of masking

these important cues

The Role of Managers in Emotion Regulation

Further evidence of the importance of emotions and their regulation to trader performance

came from interviews with trader managers A few managers described their role in primarily

technical terms focusing on risk management and personal supervision of problematic trades

However many of those we interviewed clearly saw regulating the emotions of traders who

worked for them as a key element in managing trader performance

ldquoI have to play the role of director of emotions in the sense that when they are down

you have to boost their morale and when they are too excited they want to do stupid

things I have to cool them downrdquo 119 senior manager

ldquoI care deeply because I have tremendous pride in the people herehellipThe stress is

generated by fear entirely and it‟s fear of what I guess everyone has their

insecurities whether it‟s being fired losing lots of money and appearing stupid in

front of their peer group Whatever it is it‟s definitely fear and if you can take the

fear out of the situation they perform betterrdquo 123 senior trader manager high

experience high pay

Many traders described such episodes of managerial intervention as crucial to their

learning and development For example-

ldquoI lost $1m in the first 10 days of the year This was at a time when if you made $1m

in a year that was huge I was devastated and my boss asked me for lunch at the

weekend - I thought that was the end of my career My boss said bdquoa lot of the guys

think you‟re OK but they are worried you are going to be afraid to trade that you‟re

20

going to be gun shy and lose your confidence We want you to know that we like you

and if you think you‟ve got to buy them buy them and if you‟ve got to sell them sell

them but whatever you do don‟t stop trading‟ So that was a huge relief Since then I

don‟t get too depressed about losing money although there are always good days

and bad daysrdquo 25 low experience medium performance

Other managers clearly gave thought to the relative strengths and weaknesses of more

intuitive versus more analytical traders in their decisions about matching traders to roles -

ldquoA gut trader should trade a liquid market - he might change his feel so he needs to

get out The analytical trader who thinks much more about what he‟s doing will

change their mind less often and trade with a different time frame A gut trader can

be bullish in the morning The analytical trader will look at something for a week

and then put on a position - less important to get in and out He doesn‟t need to be in

a liquid market - in an emerging market you need a more analytical traderrdquo 122

Manager

ldquoDerivatives are very quantitative and people think if you have a PhD you will be

very good because you have an understanding of options theory but this is not

always the case and you tend to overlook things Although you can put the

parameters into the model there are still a lot of things which are uncertain

Sometimes adding a more qualitative feel to it ndashbdquoyes that‟s what the model says but

the risk doesn‟t look right‟ hellip I tend to have a mixture of people on the desk - those

who are more quantitative and those who are more common sense or gut instinct

traders Having the blend is quite useful for bouncing ideasrdquo 124 Manager

These reflections have implications for management strategies in trading environments or

indeed any others where the main role of the operative is complex decision-making under

21

constraints of time and uncertain and incomplete information We consider these points further in

our discussion

Emotional Cues and the Use of Intuition

The second broad theme concerned the role of emotional cues in traderslsquo decision-

making Many of the traders discussed this aspect of emotion as intuition Traderslsquo own accounts

and conceptualizations of intuition fit well with Dane and Prattlsquos (200740) definition of intuition

as ―affectively charged judgments that arise through rapid non-conscious and holistic

associations For example -

ldquo[W]ithout a doubt some of the best bargains are the ones you dont do You know

theyre bad bargains You know It‟s a gut feel Youve looked at the playing field and

you just know this is a bad bargainrdquo 106 high experience moderate pay

Some of the traders see a more subtle and sophisticated role for emotions which represent

an unconscious drawing on experience -

ldquoI think many people do say theyre gut-feel traders but perhaps theyre not analyzing

what theyre actually thinking and theyre seeing a lot of customer flow and a lot of

buyers and they probably dont necessarily realize the reasons why they want to buy

But there are very good traders that say theyre trading off gut feel that I believe

actually have probably reasonable information reasonable thoughts behind it but

they wouldnt literally toss a coinrdquo 55 high experience high pay

Feelings are also seen as a kind of radar directing attention and shaping perceptions

around opportunities to enable them to be promptly seized

ldquoI think what a trader has to have is not necessarily this gut feeling but this nose for

opportunities If an opportunity comes along you have to be able to spot it and see it

22

and sometimes people you typically find in this business - an opportunity is there and

they cant see it and then its taken by someone else and its like oh yeah that was a

good idea but it is gonerdquo 58 high experience low pay

Not only do feelings act as a kind of radar directing attention but they do so in a way that

enables rapid decision making under time pressure As one trader noted -

ldquoTrading includes stuff which is beyond trading Trading is when you make decisions

involving financial risk that have two qualities you have to make them in someone

else‟s time schedule not your own and when you make a decision you have to be

confident when you have incomplete or imperfect information and therefore there

must be some kind of intuitive or qualitative elementrdquo 121 high experience high pay

Experienced traders made much more reference to intuition or gut feellsquo as they often

phrased it than less experienced traders However again there were important differences

between low and high paid traders in the high experience group Low paid traders who talked

about the use of intuition often talked of it in terms of a rather mysterious process You either had

a feeling or not For example

ldquoIt‟s almost like a sixth sense Something comes over you and you feel like - yes I

know they‟re going to be looking to buy these later on or looking to sell these later

onrdquo 116 high experience low pay

By contrast the top paid group tended to reflect critically about the origins of their

intuitions and to bring them together with more objective information -

ldquoIf I do fancy a stock - you have a feeling it feels right it has done nothing for like

two or three months and you‟ve seen sellers and they start to dwindle and it is just

stagnant and then you have a look on the charts you refer to the technical side as

well as the emotional side of the trade So you know a combination of technical and

23

emotional as well as what the analyst thinks as well so you sort of bring the

instruments you have available to you to make the decision rather than the snap

[snaps his finger] I fancy buying thatrdquo 101 high experience high pay

ldquoI may examine opportunities based on intuition that something is going to happen

but the decision is based on something I think is rationalrdquo 68 medium experience

high pay

Reported use of intuition does seem to increase with trader experience However traderslsquo

engagement with their feelings is qualitatively different between low and high performers High

performing traders seem to engage with their intuitions at a meta-cognitive level and make

judgments about the relevance of these feelings to the decision at hand This is consistent with

the growing literature on expertise which points to experience as a necessary but insufficient

condition for the development of expertise and points to the role of extended critical engagement

with practice in developing expertise (Ericsson 2006 Ericsson Krampe amp Tesch-Roemer

1993)

Traders were not universally positive about the role of intuition in market decision making

Some believed reliance on such feelings yields poor outcomes -

ldquoMany traders feel that models have been developed by academics who do not know

markets and [traders] think that gut feeling is more important My experience is that

this is 100 wrong and computers can make better decisions than tradersrdquo 37

medium experience medium pay

Overall however the data support a picture of expert traders having a meta-cognitive

engagement with emotion regulation This process entails discrimination between emotions in

terms of their relevance to the decision at hand and effective strategies for emotion regulation to

enhance performance

24

Empathy

The third identified theme was empathy monitoring own emotions as information

about what other market players might be feeling Only five traders explicitly described

using their own capacity for empathy as a decision making tool Although not frequent in

our data these examples are important illustrating that there is a path for traders beyond

simply seeking to eliminate or reduce the intensity of their emotions These traders

fostered feelings as a source of information about other market actors which they managed

and used in a self-aware analysis One trader described using his own fear as an indicator

of fear in the market Another described actively imagining the feelings of other market

actors ―trying to put myself in [the Bank of England Governorlsquos] feet to develop a feel for

how he feels and thinks 14 high experience high pay

Three traders talked about an emotional affinity with the feelings of people in

national markets (Spain 34 high experience medium pay Italy 70 medium experience

low pay and Japan 117 high experience medium pay) with whom they shared a common

culture and propensity to react emotionally in similar ways to the same market events This

group was small but these data broaden the picture of traders reasoning with emotionlsquo

and offer a potentially rich and fruitful avenue for future research

DISCUSSION AND CONCLUSIONS

To ask whether emotion disturbs or aids traderslsquo decision-making is to ask the wrong

question Traderslsquo emotions and cognition are inextricably linked Therefore a more productive

question to ask in this context is whether there are more or less effective strategies for managing

and using emotion in financial decision-making This has been the thrust of our analysis which

25

sought to move beyond previous work that simply characterizes emotional arousal as detrimental

to performance (eg Lo et al 2005 Schunk and Bersh 2006) The study contributes to our

understanding of the role of emotions in work and decision-making in several distinct ways In

contributing to our understanding of the role of emotion at work this study has particular

relevance in that it considers a work domain which has been theorized as strongly normatively

rational as opposed to a work domain (such as negotiation or customer service) where

performance is primarily dependent on effective social interaction However it is clear from this

study that even within such an analysis-intensive domain as financial trading emotion plays a

central role Traders and their managers are frequently preoccupied with the effective regulation

and use of emotions in their work Our work points to the value of a more nuanced understanding

which considers the role of emotions in decision-making the differential impact of various

emotion regulation strategies the conditions under which gut-feellsquo may support effective

decision-making and the role of empathic responses in understanding the behavior of other

market actors

Effective emotion regulation seems to be a critical success factor in trading for our

findings suggest that the strategies for emotion regulation adopted by expert higher performing

traders are qualitatively different from those of lower performing traders In particular higher

performers are more inclined to regulate emotions through attentional deployment and cognitive

change and may display a willingness to cope with negative feelings in the interests of

maintaining objectivity and pursuing longer term goals The kind of attention and appraisal-

focused emotion regulation strategies used by high-performing traders do not seem to be too

cognitively expensive and are effective in reducing negative experience of emotion (Gross

2002) By contrast less expert traders engage either in avoidant behaviors such as walking

away from the desk or invest significant cognitive effort in modulating their emotional

26

responses This extends previous findings (eg Grandey 2003) concerning the performance

benefits of antecedent versus response-focused emotion regulation in the context of emotion

labor to the very different context of financial decision-making Our findings also suggest that

willingness to endure negative feelings in pursuit of long-term goals may be more adaptive than

purely defensive strategies aimed at maintaining positive feelings (Labouvie-Vief 2003 Tamir

2005)

This study also provides evidence that more effective emotion regulation strategies can be

learned in a financial decision-making context While an individuallsquos preferred approach to

emotion regulation is likely to be influenced by personality traits neuroticism and extroversion in

particular (Gross amp John 2003) our interviews with traders and their managers also point to the

importance of traderslsquo learned strategies for emotion regulation Importantly our study also

suggests that defensive emotion regulation strategies may be problematic because they reduce

opportunities to exercise expert intuition

These findings go well beyond prior research on emotion regulation and performance

(eg Grandey 2003) which has a primary focus on performance in the context of interpersonal

interaction Our findings uniquely address the performance of professional traders for whom

performance is not primarily dependent on interpersonal interaction and which has been

theorized as strongly rational involving the selection of optimal strategies in the face of complex

cognitive demands and requiring attention to a large volume of information with uncertain

relevance

Turning to intuition traders in our study mirror the balance of opinion in the research

literature on intuition They are equivocal about whether feelings and hunches about appropriate

courses of action lead to better or worse outcomes than purely rational analysis There were

strong feelings on both sides with traders being quite evenly divided between the two camps

27

However again our study suggests the importance of a more nuanced approach than simply

asking whether reliance on intuition is good or bad and points towards the conditions in which

reliance on intuitive judgment may be more and less effective The findings suggest that one

characteristic of higher performing traders may be a greater willingness to reflect critically about

their intuitions and feelings about trading These traders often reported relying on intuition but

they tend to weigh their feelings critically alongside other evidence and to reflect about the

provenance of those feelings Lower performing traders may rely on feelings alone and show

less propensity to think critically about the source of hunches This reflection by expert traders

about the provenance of feelings may be particularly salient given Schwarz and Clorelsquos (1983

2003) finding that the impact of emotions on behavior is reduced or disappears when the

relevance of those emotions is explicitly called into question

That traderslsquo reliance on affective cues in decision-making can support effective

performance is consistent with Damasiolsquos observation that deciding advantageously depends on

the use of affective cues in both learning and deciding (Bechara et al 1997 Damasio 1994)

There is increasing evidence that humans are naturally proficient in the ability to acquire

expertise and that encapsulation of experience in expert intuition and perception via system one

provides a means of by-passing cognitive limits (Ericsson 2006) The nature of expertise could

counteract the inherent environmental uncertainties that Tiedens and Linton (2001) identified as

leading to more conscious appraisal of information While not an unequivocal result our finding

of greater critical engagement among higher performing traders with intuitions and their more

sophisticated deployment of intuition in combination with analysis suggests an important

direction for future research

The small number of accounts of traders monitoring their own emotions as a source of

information about the emotions of other market actors was intriguing These data suggest a

28

possibly productive avenue for future research We do not have evidence of performance

outcomes of predictive uses of empathy in this manner but our findings are consistent with

arguments that the evolution of the human brain has been significantly driven by the need to

predict the behavior of other humans often via subtle cues (eg Nicholson 2000)

We suggest that the identification of links between decision-making performance and

emotion regulation in this study has important implications for theory development in two key

fields First while somewhat tacit in much of the literature the implication of many claims in the

decision-making and behavioral finance literatures is that a range of key decision-making biases

are underpinned by mechanisms which involve emotion processes One relevant explicit example

is Thalerlsquos (1985 1999) account of the role of hedonic editinglsquo in mental accounting and the

disposition effect (the tendency to hold losing assets longer than winning assets) This explains

key biases in terms of the desire to maintain positive hedonic tone There is evidence too of

interpersonal variation in propensity to exhibit such biases for example investors vary in their

propensity to exhibit the disposition effect (Shapira amp Venezia 2001 Weber amp Welfens 2008)

In this study we have seen that traders seek to regulate emotions in order to avoid decision biases

and that higher performing traders typically exhibit more sophisticated emotion regulation

strategies This suggests that it would be productive to investigate the role of emotion regulation

as one key source of interpersonal variation in susceptibility to a range of decision biases

A second implication concerns the role of emotion in expert performance While much

attention has been paid to the nature of cognition in expert performance the expertise literature

hardly considers the role of emotion For example examining the index of the Cambridge

Handbook of Expertise and Expert Performance (Ericsson et al 2006) reveals very few

references to emotion and these are peripheral to the main arguments of the chapters which

contain them Our research suggests first that effective emotion regulation may be an important

29

facet of expert performance and second that greater attention should be paid to the interactions

between emotion emotion regulation and expert intuition Further research could test the

proposition that effective expert intuition is reduced by reliance on defensive emotion regulation

strategies

While our study points to the importance of intuition in traderslsquo work it may be that the

relative importance of intuition and analysis vary with task characteristics such as time span of

decision-making Certainly this seemed to be the view of several senior managers with

responsibility for allocating traders to trading roles The interplay that expert traders described

between intuition and analysis is also intriguing The importance of context to the role of affect

in decision-making has been noted in prior research (Forgas amp George 2001) Further research

could usefully explore this aspect of traderslsquo expertise

This study also contains some potentially important implications for practice First it

points to the importance of learned strategies for emotion regulation and the need for effective

support for their development Second our data directly and indirectly point to the key role of

management in this process Our findings suggest that there may be considerable benefits to

skilled managerial interventions that help to steer effective emotion regulation and support

inexperienced traders in developing emotion regulation skills Additionally managers may be

able to help traders to understand the productive role that critically engaged experience-based

intuition may play in decision-making Our evidence suggests that many high performing traders

deploy a reflective and critical approach to the use and development of intuition well-founded in

experience Managers could help to guide this process through coaching The contextual

dependence of high quality intuitions suggests they are quite domain specific and may not

transfer across contexts As several informants told us this is especially true for traders operating

under different market conditions

30

We heard repeated concerns from senior managers who worried about traders who had

not seen a bear market and would not operate well when that occurred We also heard many

stories of people transferring between trading areas and needing time to re-contextualize

expertise before their intuitions could be considered reliable Thus managers have a role in

helping traders to extend the boundaries of their expertise Given recent events in financial

markets our findings may be relevant to an understanding of how traders react under massively

changed trading conditions and how those reactions might either contribute to or result from

market volatility

This research has some important limitations First although we have argued for the

importance of an account of emotion that includes the experience of emotion as Pham (2004

368) notes the affective system is focused on the present Thus people can be poor at recalling or

predicting emotions There are limits to the human capacity to introspect on emotion processes

and to recall the experience of emotion These limits are also subject to wide individual

differences The capacity for introspection and recall will also vary between individuals For this

reason studies such as ours need to be complemented with more physiologically based research

as well as further qualitative and quantitative studies

Second as in all work contexts traders subscribe to norms of socially sanctioned

behavior and to common narratives about the nature of their work We have not treated emotional

labor as a primary component of traderslsquo work and performance The majority of work

interactions are carried out through highly abbreviated electronic exchanges which provide a poor

medium for the communication of emotion However there is a sense in which traders engage in

emotional labor since especially for novices there are social pressures to comply with display

rules which emphasize the avoidance of displays of strong emotion One common narrative

thread that ran though many traderslsquo accounts of their work was a representation of trading work

31

as principally concerned with rational analysis from which emotions are a dangerous distraction

This narrative seemed particularly strong in the accounts of less experienced traders Although as

we have seen the mask would often slip as they discussed their work Some traderslsquo accounts

were clearly colored by a desire to conform to this mode of self-presentation In consequence it is

possible that in our interviews and during data analysis we were at times unable to distinguish

effectively between defensive denial of emotion and effective regulation of emotion This would

be another avenue for future research

To conclude we know that emotions are a rich source of experience in everyday life but

at the same time in work contexts they can be a source of vulnerability a wayward influence over

judgment and a source of disturbance to process The more ―rational-economic such

environments are the more likely we are to hold such beliefs (Nicholson 2000) Our research

illustrates that this position is false or at best short-sighted In the hyper-rational world of

trading in financial markets we did find some evidence that emotions disturbed performance but

mostly among the inexperienced and un-reflective traders The best traders are able to regulate

emotions effectively and incorporate relevant emotions as information ndash signals or a kind of

radar that contain information about risks what is going on in the minds of others and the weight

and relevance to be accorded to onelsquos own past experience

32

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Bargh J A Chen M amp Burrows L (1996) Automaticity of social behavior Direct effects of

trait construct and stereotype activation on action Journal of Personality and Social

Psychology 71 230-244

Baumeister R F Bratslavsky E Muraven M amp Tice D M (1998) Ego depletion Is the

active self a limited resource Journal of Personality and Social Psychology 74 1252-

1265

Bechara A Damasio A Tranel D amp Damasio A R (1997) Deciding advantageously before

knowing the advantageous strategy Science 275 1293-1295

Bower G H (1981) Mood and memory American Psychologist 36 129 ndash 148

Bower G H (1991) Mood congruity of social judgments In J P Forgas (Ed) Emotion and

social judgments (pp 31ndash53) Oxford Pergamon Press

Braun V amp Clarke V (2006) Using thematic analysis in psychology Qualitative Research in

Psychology 3(2) 77-101

Buck R (1999) The biological affects a typology Psychological Reveiw 106 301-336

Damasio A R (1994) Descartes‟ error Emotion reason and the human brain New York

Putnam

Dane E amp Pratt M G (2007) Exploring intuition and its role in managerial decision making

The Academy of Management Review 32 33-54

De Bondt W Palm F amp Wolff C (2004) Introduction to the special issue on behavioral

finance Journal of Empirical Finance 11 423-427

Dreyfus H amp Dreyfus S (2005) Expertise in real world contexts Organization Studies 26

779-792

Epstein S Pacini R Denes-Raj V amp Heier H (1996) Individual differences in intuitive-

experiential and analytical-rational thinking styles Journal of Personality and Social

Psychology 71 390-405

Ericsson K A Krampe R T amp Tesch-Roemer C (1993) The role of deliberate practice in the

acquisition of expert performance Psychological Review 100 363-406

Ericsson K A (2006) An introduction to the Cambridge Handbook of Expertise and Expert

Performance its development organization and content In K A Ericsson amp N Charness

amp P J Feltovich amp R R Hoffman (Eds) The Cambridge Handbook of Expertise and

Expert Performance 1st ed 3-20 Cambridge Cambridge University Press

Fama E F (1991) Efficient Capital Markets II The Journal of Finance 46 1575-1617

Fama E F (1998) Market efficiency long-term returns and behavioral finance Journal of

Financial Economics Vol 49 283-306

Fenton-OCreevy M Nicholson N Soane E amp Willman P (2005) Traders Risks Decisions

and Management in Financial Markets Oxford Oxford University Press

Finucane M L Alhakami A Slovic P amp Johnson S M (2000) The affect heuristic in

judgments of risks and benefits Journal of Behavioral Decision Making 13(1) 1-17

Forgas JP amp George JM (2001) Affective influences on judgments and behavior in

organizations An information processing perspective Organizational Behavior and

Human Decision Processes 86(1) 3-34

Grandey AA (2000) Emotion Regulation in the Workplace A new way to conceptualize

Emotional Labor Journal of Occupational Health Psychology 5(1) 95-110

33

Grandey A A (2003) When the show must go on surface acting and deep acting as

determinants of emotional exhaustion and peer-rated service delivery Academy of

Management Journal 46 86-96

Gray JA (1999) Cognition emotion conscious experience and the brain In T Dalgleish and

MJ Power (Eds) Handbook of Cognition and Emotion (pp83-102) Chichester England

Wiley

Gross J (2002) Emotion regulation affective cognitive and social consequences

Psychophysiology 39 281

Gross J J amp John O P (2003) Individual differences in two emotion regulation processes

Implications for affect relationships and well-being Journal of Personality and Social

Psychology 85(2) 348-362

Gross J J amp Thompson R A (2007) Emotion regulation Conceptual foundations In J J

Gross (Ed) Handbook of emotion regulation New York NY Guilford Press

Isen A M Shalker T E Clark M amp Karp L (1978) Affect accessibility of material in

memory and behavior A cognitive loop Journal of Personality and Social Psychology

36 1-12

Johnson E amp Tversky A (1983) Affect generalization and the perception of risk Journal of

Personality and Social Psychology 45(1) 20-31

Kavanaugh D amp Bower G (1985) Mood and self-efficacy Impact of job and sadness on

perceived capabilities Cognitive Therapy and Research 9 507-525

Klein G A Calderwood R amp Clinton Cirocco A (1986) Rapid decision-making on the

fireground Human Factors and Ergonomics Society 30th Annual Meeting Vol 1 576-

580

Knorr-Cetina K amp Brugger U (2002) Traders Engagement with Markets A Postsocial

Relationship Theory Culture and Society 19(5-6) 161-185

Labouvie-Vief G (2003) Dynamic integration Affect cognition and the self in adulthood

Current Directions in Psychological Science 12 201-206

Lerner J S amp Keltner D (2001) Fear anger and risk Journal of Personality and Social

Psychology 81(1) 146-159

Lerner J S Small D A amp Loewenstein G (2004) Heart strings and purse strings Carryover

effects of emotions on economic decisions Psychological Science 15(5) 337-341

Lo A Repin D amp Steenbarger B (2005) Fear and greed in financial markets A clinical study

of day traders American Economic Review 95 352-359

Lo A W amp Repin D V (2002) The Psychophysiology of Real-Time Financial Risk

Processing Journal of Cognitive Neuroscience 14 323-339

MacKenzie D (2006) An Engine Not A Camera How Financial Models Shape Markets

Cambridge Mass MIT Press

Mayer JD amp Hanson A (1995) Mood-congruent judgment over time Personality and Social

Psychology Bulletin 21 237-244

Mayer JD DiPaolo M and Salovey P (1990) Perceiving affective content in ambiguous

visual stimuli a component of emotional intelligence Journal of Personality Assessment

54 772-781

Miller G (2003) The cognitive revolution a historical perspective Trends in Cognitive Science

7 141

Muraven M amp Baumeister R F (2000) Self-regulation and depletion of limited resources

Does self-control resemble a muscle Psychological Bulletin 126 247-259

Nicholson N (2000) Managing the Human Animal London ThomsonTexere

34

Peterson R L (2007) Affect and financial decision-making How neuroscience can inform

market participants The Journal of Behavioral Finance 8(2) 70-78

Pham M T (2004) The logic of feeling Journal of Consumer Psychology 14 360-369

Phelps E A (2006) Emotion and cognition Insights from studies of the human amygdala

Annual Review of Psychology 57 27-53

Sayer A (1997) Essentialism social constructionism and beyond The Sociological Review 45

453-487

Shapira Z amp Venezia I (2001) Patterns of behavior of professionally managed and

independent investors Journal of Banking and Finance 25 1573ndash1587

Schunk D amp Betsch C (2006) Explaining the heterogeneity in utility functions by individual

differences in decision modes Journal of Economic Psychology 27 386-401

Schwager J D (1993) Market Wizards Interviews with Top Traders New York Collins

Schwarz N amp Clore G L (1983) Mood misattribution and judgments of well-being

Informative and directive functions of affective states Journal of Personality and Social

Psychology 45 513-523

Seo M G Barrett L F amp Bartunek J M (2004) The role of affective experience in work

motivation Academy of Management Review 29 423-439

Seo M G amp Barrett L F (2007) Being emotional during decision makingmdashgood or bad An

empirical investigation The Academy of Management Journal 50 923-940

Shefrin H (2000) Beyond Greed and Fear Understanding Behavioral Finance and the

Psychology of Investing Boston MA Harvard Business School Press

Stokes A F Kemper K amp Kite K (1997) Aeronautical decision making cue recognition and

expertise under time pressure In C E Zsambok amp G Klein (Eds) Naturalistic Decision

Making pp 183-196 Mahwah NJ Erlbaum

Tamir M (2005) Dont worry be happy Neuroticism trait-consistent affect regulation

and performance Journal of Personality and Social Psychology 89 (3) 449 ndash

461

Thaler R H (1985) Mental accounting and consumer choice Marketing Science 4(3) 199-214

Thaler R H (1993) Advances In Behavioral Finance New York Russel Sage Foundation

Thaler R H (1999) Mental accounting matters Journal of Behavioral Decision Making 12(3)

183-206

Tiedens L amp Linton S (2001) Judgment under emotional certainty and uncertainty the effects

of specific emotions on information processing Journal of Personality and Social

Psychology 81(6) 973-988

Todd P M amp Gigerenzer G (2007) Environments that make us smart Ecological rationality

Current Directions in Psychological Science 16 167-171

Totterdell P Briner R B Parkinson B amp Reynolds S (1996) Fingerprinting time series

dynamic patterns in self-report and performance measures uncovered by a graphical non-

linear method British Journal of Psychology 87(1) 43-60

Weber M amp Welfens F (2008) Splitting the Disposition Effect Asymmetric Reactions

Towards bdquoSelling winners‟ and bdquoHolding Losers‟ Working Paper University of

Mannheim

Wright WF amp Bower GH (1992) Mood effects on subjective probability assessment

Organizational Behavior and Human Decision Processes 52 276ndash91

12

both We gathered information on individual trader characteristics and performance and carried

out semi-structured interviews with each trader and with a further 10 senior managers Where

traders were also managers we interviewed them twice once as a trader and once as a manager

Data

Qualitative data Interviews lasted between 30 and 90 minutes They were recorded and

transcribed in full The interviews ranged over multiple aspects of the traderslsquo roles and work

The data set for this study consisted of the portions of the interviews relevant to the role of

feelings in traderslsquo work and decision making Traders were asked to describe the range of

emotions they experienced during trading Follow-up questions encouraged them to explore the

long-term and short-term effects of emotions on their decision making and trading strategy the

role of intuition in their trading and the impact of emotions on performance Managers were

asked to describe how they evaluated and managed trader performance Again this often

produced talk about traderslsquo feelings and how they were managed

Performance data Hard performance data for traders are difficult to obtain Measures

such as value at risk trading outcomes and profit and loss are highly confidential in this setting

and were not available to us so we used total remuneration as our measure of trader performance

We felt this to be a reasonable proxy for decision-performance since a high proportion of total

remuneration is a variable annual performance linked bonus and the non-bonus elements tend to

reflect longer term financial performance in this very performance oriented sector We have

treated this variable as an indicator of expertise which Ericsson (2006) defines as reliably

superior performancelsquo Traders were asked to state their income including bonus in terms of

four categories (1 pound50000 - pound99999 (N = 4) 2 pound100000 to pound299999 (N = 41) 3 pound300000-

pound499999 (N = 34) 4 more than pound500000(N = 38) One trader declined to provide this

information

13

Analysis

The raw data were the full transcripts of all interviews We used a thematic analysis

approach which we judged to be particularly well suited to the present study As Braun and

Clarke (2006 78) note thematic analysis does not rest on a single epistemic position but can

span both realist and constructivist approaches We take the position that emotions have both a

measurable biological reality and exist in the realm of socially constructed personal experience in

which emotions have personal and social meaning

Data were open-coded by each author separately then in discussion using the NVIVO

program Common statements were identified and used as the basis for a first set of coding

categories which were subsequently refined and consolidated Coding categories were thus both

emergent from the interviews and drew on constructs identified in the literature (eg approaches

to emotion regulation) relevant to emerging themes Thus coding was both theoretical and

inductive As we analyzed the data and drew tentative conclusions we explicitly sought

disconfirming evidence to test the robustness of our insights In a later stage of analysis we

partitioned the sample into groups of low (lt5 years n=25) medium (5 to 10 years n=48) and

high experience (gt10 years N=45) and into groups of low (remunerationlt pound300k N=45) medium

(pound300k- pound500k N=34) and high expertise (gt pound500k N=38) We compare interview responses of

three specific groups inexperienced low paid traders (N=18) highly experienced but low paid

traders (N=15) and high paid traders (N=38) The remainder of the sample were medium

experience and pay There were no low experience high pay traders We chose the three

comparison groups to provide maximal contrast in differentiating the characteristics associated

with different levels of experience and expertise respectively

14

In Table 1 we summarize our key findings and the nature of the evidence for each finding

In the final column we note our sense of the strength of the evidence for each finding This

represents a qualitative conclusion arrived at though discussion between the authors and drawing

on quantity consistency importance and clarity of supporting data and existence of any

disconfirming evidence In the next section of the paper we discuss these findings and the

evidence for them in more detail Direct quotes are verbatim accompanied by the case number of

the respondent and their classification in terms of experience and pay level

TABLE 1 ABOUT HERE

TRADERSrsquo UNDERSTANDINGS OF EMOTION IN THEIR TRADING PRACTICE

Emotional experience and regulation

For many traders especially the less experienced trading is marked by significant and

persistent emotional responses to successes and setbacks It is relevant to note the distinction

between mood and emotion since both were relevant to traders Mood can be understood as a

relatively diffuse emotional climate which persists over time and not anchored to specific

situations or cognitions In contrast emotions typically have specific objects and give rise to

behavioral response tendencies relevant to those objects (Totterdell Briner et al 1996)

ldquoWhen you lose money you could sit down and cry Anybody who says you couldn‟t

isn‟t being honest with you Of course when it‟s good it‟s fantastic The highs and

lows of a trader‟s life are euphoria or absolute dismayrdquo 106 high experience

medium pay

While these emotional responses would often be triggered by specific events or series of

events in many cases the impact on mood would persist for significant periods with

consequences for subsequent trading behavior For example one manager described a trader

15

working for him as ―having been in the wilderness his confidence totally shattered for about

two years before slowly recovering from a string of losses Many talked about needing weeks or

even months to recover from the impact of major losses especially early in their careers Others

talked about the dangers of false confidence or euphoria which could persist for some time after a

big win

ldquoPeople get a bit arrogant when they have good times but this can be dangerous

because then they stop thinking as muchrdquo 18 medium experience medium pay

ldquoI tend to feel more cautious when losing moneyhellipIf I am having a down month I‟ll

look at trades which I would do if I was having a good month and say I don‟t like it

enough to take the risk on it I become more selective more risk averse and to do a

trade I need to see more than one reason why a trade will work and then might put it

on but not in a huge size When making money I can be more slack 29 high

experience high pay

However our data also suggest emotion regulation is critical to moderating the impact of

emotions on traderslsquo decision making Senior traders and trader managers frequently talked about

the way in which they had developed a capacity to regulate their own emotions and trade more

evenly regardless of success and setbacks

ldquoYou learn to be able to deal with emotions It doesn‟t get to me as much There

were situations when I was extremely stressed up and then you feel physically ill and

you really feel on the verge of throwing up But that was a long time ago and doesn‟t

happen so much now You have seen the ups and downs more You have experienced

them and in a way you are probably more prepared for it and you are aware that

every now and then it will happenhellip but it doesn‟t get to you all that much because

you are aware that it will happen 6 medium experience high pay

16

We examined emotion regulation and its relevance to performance further by considering

data from the three comparison groups (based on experience and pay) We noticed some

important differences in the way in which these groups discussed the interaction between

emotion trading and the use of intuition First there seemed to be notable differences in the

strategies employed for emotion regulation which we describe below in the language of the

Gross and Thompson model (2007) When asked directly about emotion traders in the low

experience group typically started by presenting themselves as fairly immune to the impact of

emotion on their trading However as the interview progressed they would often reveal rather

more vulnerability to emotions than they had claimed initially Take for example this trader who

had been trading for a little less than 4 years -

ldquoI‟m bit of a cold fish I don‟t think emotions greatly affect my decision-making If

you are making money you are achieving your objectivehellip

[But later]

hellipWhen you lose money it can be horrendous violent mood swings You don‟t know

what to do when you lose moneyrdquo 38 low experience low pay

There tended to be two responses types when these traders did talk about their emotions

Some in the low experience low pay group did not talk at all about actively managing their

emotions Others talked about removing themselves from situations when their emotions became

a problem (situation modification) or avoiding situations entirely which make them feel bad

(situation selection)

ldquoI think there is a strong emotional element to trading I think that anyone who‟s

doing it properly and has got their head screwed on is doing everything they can

consciously to overrule that and if I feel that I‟m trading emotionally I will walk off

17

the desk have a glass of water walk up and down the street and then come back and

make decisions when I‟m hopefully not emotionalrdquo 43 low experience low pay

Traders in the experienced group more commonly talked about strategies for emotion

regulation However the nature of these strategies tended to vary between the low paid and high

paid groups In the high experience low paid group traders seemed to find it hard to articulate

how they managed their emotions and the emotion regulation strategies they identified were

predominately situation avoidance situation modification and response modulation

ldquoIf you get two or three decisions wrong you find you might not take a risk for a

month until you build up your confidence There‟s definitely a lot of confidence

involvedrdquo 104 high experience low pay

ldquoI try and keep my emotions under tight controlrdquo 105 high experience low pay

There is a marked contrast in the discourse of the high performing traders who often

showed a greater willingness to reflect on their emotion-driven behavior (the two exceptions to

this were traders with whom we had only short interviews with little opportunity for extended

reflection rather than any denial of the role of emotion) Emotion regulation for these traders

tended to focus mainly on how they directed their attention (attentional deployment) and how

they framed experiences of loss and gain (cognitive change)

ldquoBig losses and big gains can swap around fairly quickly and once you understand

that then you stop concentrating on the loss and you start concentrating more on how

to make money back hellip One big trade is not going to make anyone and one big loss

doesn‟t destroy yourdquo 15 high experience high pay

ldquoExperience definitely helps having traded through the crash etc Youve seen

different scenarios and newer people its like oh my god its the end of the world

whereas there is life after death and so I think that type of experience helps It doesnt

18

necessarily help the new situation on what to do but it just helps your judgmentrdquo 55

high experience high pay

There was a notable absence of avoidant behavior in this group Several participants told

stories which implied a significant degree of persistence in the face of negative emotion

ldquoI had one very bad year from which I learned quite a lot I learned that the

overshooting can go on for a very long time it can be very painful you can hit risk

limits hellip I did not want to get out of the trades so kept the trades and then next year

they made more money than they lost I don‟t think I panicked but I was getting calls

from the CEO Reason prevailed in the end Emotionally it was not easy to cope

with There were times when the desk was down close to $100m I lost almost that

much in days I was under a lot of pressure from New York because they did not

understand my positions but in the end we managed to keep the positions and made

money the next year The hardest thing was persuading others that I had a good

traderdquo 14 high experience high pay

This willingness among some of the high performing traders to experience negative

emotion in order to achieve longer term goals is consistent with Labouvie-Vieflsquos (2003)

argument that positive self-development requires not just strategies to optimize positive affect

but also the ability to tolerate tension and negativity to achieve long term goals

However there may be another important reason why response modulation strategies are

maladaptive for traders As we have seen above while poorly regulated emotions carry over to

subsequent trading and risk biasing subsequent trading behavior emotion cues generated by

reactions to information relevant to current trading under time constraints play an important role

in guiding attention and rapidly choosing appropriate action Both poor regulation of non-

19

relevant emotions and recourse to the attempted suppression of all feeling run the risk of masking

these important cues

The Role of Managers in Emotion Regulation

Further evidence of the importance of emotions and their regulation to trader performance

came from interviews with trader managers A few managers described their role in primarily

technical terms focusing on risk management and personal supervision of problematic trades

However many of those we interviewed clearly saw regulating the emotions of traders who

worked for them as a key element in managing trader performance

ldquoI have to play the role of director of emotions in the sense that when they are down

you have to boost their morale and when they are too excited they want to do stupid

things I have to cool them downrdquo 119 senior manager

ldquoI care deeply because I have tremendous pride in the people herehellipThe stress is

generated by fear entirely and it‟s fear of what I guess everyone has their

insecurities whether it‟s being fired losing lots of money and appearing stupid in

front of their peer group Whatever it is it‟s definitely fear and if you can take the

fear out of the situation they perform betterrdquo 123 senior trader manager high

experience high pay

Many traders described such episodes of managerial intervention as crucial to their

learning and development For example-

ldquoI lost $1m in the first 10 days of the year This was at a time when if you made $1m

in a year that was huge I was devastated and my boss asked me for lunch at the

weekend - I thought that was the end of my career My boss said bdquoa lot of the guys

think you‟re OK but they are worried you are going to be afraid to trade that you‟re

20

going to be gun shy and lose your confidence We want you to know that we like you

and if you think you‟ve got to buy them buy them and if you‟ve got to sell them sell

them but whatever you do don‟t stop trading‟ So that was a huge relief Since then I

don‟t get too depressed about losing money although there are always good days

and bad daysrdquo 25 low experience medium performance

Other managers clearly gave thought to the relative strengths and weaknesses of more

intuitive versus more analytical traders in their decisions about matching traders to roles -

ldquoA gut trader should trade a liquid market - he might change his feel so he needs to

get out The analytical trader who thinks much more about what he‟s doing will

change their mind less often and trade with a different time frame A gut trader can

be bullish in the morning The analytical trader will look at something for a week

and then put on a position - less important to get in and out He doesn‟t need to be in

a liquid market - in an emerging market you need a more analytical traderrdquo 122

Manager

ldquoDerivatives are very quantitative and people think if you have a PhD you will be

very good because you have an understanding of options theory but this is not

always the case and you tend to overlook things Although you can put the

parameters into the model there are still a lot of things which are uncertain

Sometimes adding a more qualitative feel to it ndashbdquoyes that‟s what the model says but

the risk doesn‟t look right‟ hellip I tend to have a mixture of people on the desk - those

who are more quantitative and those who are more common sense or gut instinct

traders Having the blend is quite useful for bouncing ideasrdquo 124 Manager

These reflections have implications for management strategies in trading environments or

indeed any others where the main role of the operative is complex decision-making under

21

constraints of time and uncertain and incomplete information We consider these points further in

our discussion

Emotional Cues and the Use of Intuition

The second broad theme concerned the role of emotional cues in traderslsquo decision-

making Many of the traders discussed this aspect of emotion as intuition Traderslsquo own accounts

and conceptualizations of intuition fit well with Dane and Prattlsquos (200740) definition of intuition

as ―affectively charged judgments that arise through rapid non-conscious and holistic

associations For example -

ldquo[W]ithout a doubt some of the best bargains are the ones you dont do You know

theyre bad bargains You know It‟s a gut feel Youve looked at the playing field and

you just know this is a bad bargainrdquo 106 high experience moderate pay

Some of the traders see a more subtle and sophisticated role for emotions which represent

an unconscious drawing on experience -

ldquoI think many people do say theyre gut-feel traders but perhaps theyre not analyzing

what theyre actually thinking and theyre seeing a lot of customer flow and a lot of

buyers and they probably dont necessarily realize the reasons why they want to buy

But there are very good traders that say theyre trading off gut feel that I believe

actually have probably reasonable information reasonable thoughts behind it but

they wouldnt literally toss a coinrdquo 55 high experience high pay

Feelings are also seen as a kind of radar directing attention and shaping perceptions

around opportunities to enable them to be promptly seized

ldquoI think what a trader has to have is not necessarily this gut feeling but this nose for

opportunities If an opportunity comes along you have to be able to spot it and see it

22

and sometimes people you typically find in this business - an opportunity is there and

they cant see it and then its taken by someone else and its like oh yeah that was a

good idea but it is gonerdquo 58 high experience low pay

Not only do feelings act as a kind of radar directing attention but they do so in a way that

enables rapid decision making under time pressure As one trader noted -

ldquoTrading includes stuff which is beyond trading Trading is when you make decisions

involving financial risk that have two qualities you have to make them in someone

else‟s time schedule not your own and when you make a decision you have to be

confident when you have incomplete or imperfect information and therefore there

must be some kind of intuitive or qualitative elementrdquo 121 high experience high pay

Experienced traders made much more reference to intuition or gut feellsquo as they often

phrased it than less experienced traders However again there were important differences

between low and high paid traders in the high experience group Low paid traders who talked

about the use of intuition often talked of it in terms of a rather mysterious process You either had

a feeling or not For example

ldquoIt‟s almost like a sixth sense Something comes over you and you feel like - yes I

know they‟re going to be looking to buy these later on or looking to sell these later

onrdquo 116 high experience low pay

By contrast the top paid group tended to reflect critically about the origins of their

intuitions and to bring them together with more objective information -

ldquoIf I do fancy a stock - you have a feeling it feels right it has done nothing for like

two or three months and you‟ve seen sellers and they start to dwindle and it is just

stagnant and then you have a look on the charts you refer to the technical side as

well as the emotional side of the trade So you know a combination of technical and

23

emotional as well as what the analyst thinks as well so you sort of bring the

instruments you have available to you to make the decision rather than the snap

[snaps his finger] I fancy buying thatrdquo 101 high experience high pay

ldquoI may examine opportunities based on intuition that something is going to happen

but the decision is based on something I think is rationalrdquo 68 medium experience

high pay

Reported use of intuition does seem to increase with trader experience However traderslsquo

engagement with their feelings is qualitatively different between low and high performers High

performing traders seem to engage with their intuitions at a meta-cognitive level and make

judgments about the relevance of these feelings to the decision at hand This is consistent with

the growing literature on expertise which points to experience as a necessary but insufficient

condition for the development of expertise and points to the role of extended critical engagement

with practice in developing expertise (Ericsson 2006 Ericsson Krampe amp Tesch-Roemer

1993)

Traders were not universally positive about the role of intuition in market decision making

Some believed reliance on such feelings yields poor outcomes -

ldquoMany traders feel that models have been developed by academics who do not know

markets and [traders] think that gut feeling is more important My experience is that

this is 100 wrong and computers can make better decisions than tradersrdquo 37

medium experience medium pay

Overall however the data support a picture of expert traders having a meta-cognitive

engagement with emotion regulation This process entails discrimination between emotions in

terms of their relevance to the decision at hand and effective strategies for emotion regulation to

enhance performance

24

Empathy

The third identified theme was empathy monitoring own emotions as information

about what other market players might be feeling Only five traders explicitly described

using their own capacity for empathy as a decision making tool Although not frequent in

our data these examples are important illustrating that there is a path for traders beyond

simply seeking to eliminate or reduce the intensity of their emotions These traders

fostered feelings as a source of information about other market actors which they managed

and used in a self-aware analysis One trader described using his own fear as an indicator

of fear in the market Another described actively imagining the feelings of other market

actors ―trying to put myself in [the Bank of England Governorlsquos] feet to develop a feel for

how he feels and thinks 14 high experience high pay

Three traders talked about an emotional affinity with the feelings of people in

national markets (Spain 34 high experience medium pay Italy 70 medium experience

low pay and Japan 117 high experience medium pay) with whom they shared a common

culture and propensity to react emotionally in similar ways to the same market events This

group was small but these data broaden the picture of traders reasoning with emotionlsquo

and offer a potentially rich and fruitful avenue for future research

DISCUSSION AND CONCLUSIONS

To ask whether emotion disturbs or aids traderslsquo decision-making is to ask the wrong

question Traderslsquo emotions and cognition are inextricably linked Therefore a more productive

question to ask in this context is whether there are more or less effective strategies for managing

and using emotion in financial decision-making This has been the thrust of our analysis which

25

sought to move beyond previous work that simply characterizes emotional arousal as detrimental

to performance (eg Lo et al 2005 Schunk and Bersh 2006) The study contributes to our

understanding of the role of emotions in work and decision-making in several distinct ways In

contributing to our understanding of the role of emotion at work this study has particular

relevance in that it considers a work domain which has been theorized as strongly normatively

rational as opposed to a work domain (such as negotiation or customer service) where

performance is primarily dependent on effective social interaction However it is clear from this

study that even within such an analysis-intensive domain as financial trading emotion plays a

central role Traders and their managers are frequently preoccupied with the effective regulation

and use of emotions in their work Our work points to the value of a more nuanced understanding

which considers the role of emotions in decision-making the differential impact of various

emotion regulation strategies the conditions under which gut-feellsquo may support effective

decision-making and the role of empathic responses in understanding the behavior of other

market actors

Effective emotion regulation seems to be a critical success factor in trading for our

findings suggest that the strategies for emotion regulation adopted by expert higher performing

traders are qualitatively different from those of lower performing traders In particular higher

performers are more inclined to regulate emotions through attentional deployment and cognitive

change and may display a willingness to cope with negative feelings in the interests of

maintaining objectivity and pursuing longer term goals The kind of attention and appraisal-

focused emotion regulation strategies used by high-performing traders do not seem to be too

cognitively expensive and are effective in reducing negative experience of emotion (Gross

2002) By contrast less expert traders engage either in avoidant behaviors such as walking

away from the desk or invest significant cognitive effort in modulating their emotional

26

responses This extends previous findings (eg Grandey 2003) concerning the performance

benefits of antecedent versus response-focused emotion regulation in the context of emotion

labor to the very different context of financial decision-making Our findings also suggest that

willingness to endure negative feelings in pursuit of long-term goals may be more adaptive than

purely defensive strategies aimed at maintaining positive feelings (Labouvie-Vief 2003 Tamir

2005)

This study also provides evidence that more effective emotion regulation strategies can be

learned in a financial decision-making context While an individuallsquos preferred approach to

emotion regulation is likely to be influenced by personality traits neuroticism and extroversion in

particular (Gross amp John 2003) our interviews with traders and their managers also point to the

importance of traderslsquo learned strategies for emotion regulation Importantly our study also

suggests that defensive emotion regulation strategies may be problematic because they reduce

opportunities to exercise expert intuition

These findings go well beyond prior research on emotion regulation and performance

(eg Grandey 2003) which has a primary focus on performance in the context of interpersonal

interaction Our findings uniquely address the performance of professional traders for whom

performance is not primarily dependent on interpersonal interaction and which has been

theorized as strongly rational involving the selection of optimal strategies in the face of complex

cognitive demands and requiring attention to a large volume of information with uncertain

relevance

Turning to intuition traders in our study mirror the balance of opinion in the research

literature on intuition They are equivocal about whether feelings and hunches about appropriate

courses of action lead to better or worse outcomes than purely rational analysis There were

strong feelings on both sides with traders being quite evenly divided between the two camps

27

However again our study suggests the importance of a more nuanced approach than simply

asking whether reliance on intuition is good or bad and points towards the conditions in which

reliance on intuitive judgment may be more and less effective The findings suggest that one

characteristic of higher performing traders may be a greater willingness to reflect critically about

their intuitions and feelings about trading These traders often reported relying on intuition but

they tend to weigh their feelings critically alongside other evidence and to reflect about the

provenance of those feelings Lower performing traders may rely on feelings alone and show

less propensity to think critically about the source of hunches This reflection by expert traders

about the provenance of feelings may be particularly salient given Schwarz and Clorelsquos (1983

2003) finding that the impact of emotions on behavior is reduced or disappears when the

relevance of those emotions is explicitly called into question

That traderslsquo reliance on affective cues in decision-making can support effective

performance is consistent with Damasiolsquos observation that deciding advantageously depends on

the use of affective cues in both learning and deciding (Bechara et al 1997 Damasio 1994)

There is increasing evidence that humans are naturally proficient in the ability to acquire

expertise and that encapsulation of experience in expert intuition and perception via system one

provides a means of by-passing cognitive limits (Ericsson 2006) The nature of expertise could

counteract the inherent environmental uncertainties that Tiedens and Linton (2001) identified as

leading to more conscious appraisal of information While not an unequivocal result our finding

of greater critical engagement among higher performing traders with intuitions and their more

sophisticated deployment of intuition in combination with analysis suggests an important

direction for future research

The small number of accounts of traders monitoring their own emotions as a source of

information about the emotions of other market actors was intriguing These data suggest a

28

possibly productive avenue for future research We do not have evidence of performance

outcomes of predictive uses of empathy in this manner but our findings are consistent with

arguments that the evolution of the human brain has been significantly driven by the need to

predict the behavior of other humans often via subtle cues (eg Nicholson 2000)

We suggest that the identification of links between decision-making performance and

emotion regulation in this study has important implications for theory development in two key

fields First while somewhat tacit in much of the literature the implication of many claims in the

decision-making and behavioral finance literatures is that a range of key decision-making biases

are underpinned by mechanisms which involve emotion processes One relevant explicit example

is Thalerlsquos (1985 1999) account of the role of hedonic editinglsquo in mental accounting and the

disposition effect (the tendency to hold losing assets longer than winning assets) This explains

key biases in terms of the desire to maintain positive hedonic tone There is evidence too of

interpersonal variation in propensity to exhibit such biases for example investors vary in their

propensity to exhibit the disposition effect (Shapira amp Venezia 2001 Weber amp Welfens 2008)

In this study we have seen that traders seek to regulate emotions in order to avoid decision biases

and that higher performing traders typically exhibit more sophisticated emotion regulation

strategies This suggests that it would be productive to investigate the role of emotion regulation

as one key source of interpersonal variation in susceptibility to a range of decision biases

A second implication concerns the role of emotion in expert performance While much

attention has been paid to the nature of cognition in expert performance the expertise literature

hardly considers the role of emotion For example examining the index of the Cambridge

Handbook of Expertise and Expert Performance (Ericsson et al 2006) reveals very few

references to emotion and these are peripheral to the main arguments of the chapters which

contain them Our research suggests first that effective emotion regulation may be an important

29

facet of expert performance and second that greater attention should be paid to the interactions

between emotion emotion regulation and expert intuition Further research could test the

proposition that effective expert intuition is reduced by reliance on defensive emotion regulation

strategies

While our study points to the importance of intuition in traderslsquo work it may be that the

relative importance of intuition and analysis vary with task characteristics such as time span of

decision-making Certainly this seemed to be the view of several senior managers with

responsibility for allocating traders to trading roles The interplay that expert traders described

between intuition and analysis is also intriguing The importance of context to the role of affect

in decision-making has been noted in prior research (Forgas amp George 2001) Further research

could usefully explore this aspect of traderslsquo expertise

This study also contains some potentially important implications for practice First it

points to the importance of learned strategies for emotion regulation and the need for effective

support for their development Second our data directly and indirectly point to the key role of

management in this process Our findings suggest that there may be considerable benefits to

skilled managerial interventions that help to steer effective emotion regulation and support

inexperienced traders in developing emotion regulation skills Additionally managers may be

able to help traders to understand the productive role that critically engaged experience-based

intuition may play in decision-making Our evidence suggests that many high performing traders

deploy a reflective and critical approach to the use and development of intuition well-founded in

experience Managers could help to guide this process through coaching The contextual

dependence of high quality intuitions suggests they are quite domain specific and may not

transfer across contexts As several informants told us this is especially true for traders operating

under different market conditions

30

We heard repeated concerns from senior managers who worried about traders who had

not seen a bear market and would not operate well when that occurred We also heard many

stories of people transferring between trading areas and needing time to re-contextualize

expertise before their intuitions could be considered reliable Thus managers have a role in

helping traders to extend the boundaries of their expertise Given recent events in financial

markets our findings may be relevant to an understanding of how traders react under massively

changed trading conditions and how those reactions might either contribute to or result from

market volatility

This research has some important limitations First although we have argued for the

importance of an account of emotion that includes the experience of emotion as Pham (2004

368) notes the affective system is focused on the present Thus people can be poor at recalling or

predicting emotions There are limits to the human capacity to introspect on emotion processes

and to recall the experience of emotion These limits are also subject to wide individual

differences The capacity for introspection and recall will also vary between individuals For this

reason studies such as ours need to be complemented with more physiologically based research

as well as further qualitative and quantitative studies

Second as in all work contexts traders subscribe to norms of socially sanctioned

behavior and to common narratives about the nature of their work We have not treated emotional

labor as a primary component of traderslsquo work and performance The majority of work

interactions are carried out through highly abbreviated electronic exchanges which provide a poor

medium for the communication of emotion However there is a sense in which traders engage in

emotional labor since especially for novices there are social pressures to comply with display

rules which emphasize the avoidance of displays of strong emotion One common narrative

thread that ran though many traderslsquo accounts of their work was a representation of trading work

31

as principally concerned with rational analysis from which emotions are a dangerous distraction

This narrative seemed particularly strong in the accounts of less experienced traders Although as

we have seen the mask would often slip as they discussed their work Some traderslsquo accounts

were clearly colored by a desire to conform to this mode of self-presentation In consequence it is

possible that in our interviews and during data analysis we were at times unable to distinguish

effectively between defensive denial of emotion and effective regulation of emotion This would

be another avenue for future research

To conclude we know that emotions are a rich source of experience in everyday life but

at the same time in work contexts they can be a source of vulnerability a wayward influence over

judgment and a source of disturbance to process The more ―rational-economic such

environments are the more likely we are to hold such beliefs (Nicholson 2000) Our research

illustrates that this position is false or at best short-sighted In the hyper-rational world of

trading in financial markets we did find some evidence that emotions disturbed performance but

mostly among the inexperienced and un-reflective traders The best traders are able to regulate

emotions effectively and incorporate relevant emotions as information ndash signals or a kind of

radar that contain information about risks what is going on in the minds of others and the weight

and relevance to be accorded to onelsquos own past experience

32

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Bargh J A Chen M amp Burrows L (1996) Automaticity of social behavior Direct effects of

trait construct and stereotype activation on action Journal of Personality and Social

Psychology 71 230-244

Baumeister R F Bratslavsky E Muraven M amp Tice D M (1998) Ego depletion Is the

active self a limited resource Journal of Personality and Social Psychology 74 1252-

1265

Bechara A Damasio A Tranel D amp Damasio A R (1997) Deciding advantageously before

knowing the advantageous strategy Science 275 1293-1295

Bower G H (1981) Mood and memory American Psychologist 36 129 ndash 148

Bower G H (1991) Mood congruity of social judgments In J P Forgas (Ed) Emotion and

social judgments (pp 31ndash53) Oxford Pergamon Press

Braun V amp Clarke V (2006) Using thematic analysis in psychology Qualitative Research in

Psychology 3(2) 77-101

Buck R (1999) The biological affects a typology Psychological Reveiw 106 301-336

Damasio A R (1994) Descartes‟ error Emotion reason and the human brain New York

Putnam

Dane E amp Pratt M G (2007) Exploring intuition and its role in managerial decision making

The Academy of Management Review 32 33-54

De Bondt W Palm F amp Wolff C (2004) Introduction to the special issue on behavioral

finance Journal of Empirical Finance 11 423-427

Dreyfus H amp Dreyfus S (2005) Expertise in real world contexts Organization Studies 26

779-792

Epstein S Pacini R Denes-Raj V amp Heier H (1996) Individual differences in intuitive-

experiential and analytical-rational thinking styles Journal of Personality and Social

Psychology 71 390-405

Ericsson K A Krampe R T amp Tesch-Roemer C (1993) The role of deliberate practice in the

acquisition of expert performance Psychological Review 100 363-406

Ericsson K A (2006) An introduction to the Cambridge Handbook of Expertise and Expert

Performance its development organization and content In K A Ericsson amp N Charness

amp P J Feltovich amp R R Hoffman (Eds) The Cambridge Handbook of Expertise and

Expert Performance 1st ed 3-20 Cambridge Cambridge University Press

Fama E F (1991) Efficient Capital Markets II The Journal of Finance 46 1575-1617

Fama E F (1998) Market efficiency long-term returns and behavioral finance Journal of

Financial Economics Vol 49 283-306

Fenton-OCreevy M Nicholson N Soane E amp Willman P (2005) Traders Risks Decisions

and Management in Financial Markets Oxford Oxford University Press

Finucane M L Alhakami A Slovic P amp Johnson S M (2000) The affect heuristic in

judgments of risks and benefits Journal of Behavioral Decision Making 13(1) 1-17

Forgas JP amp George JM (2001) Affective influences on judgments and behavior in

organizations An information processing perspective Organizational Behavior and

Human Decision Processes 86(1) 3-34

Grandey AA (2000) Emotion Regulation in the Workplace A new way to conceptualize

Emotional Labor Journal of Occupational Health Psychology 5(1) 95-110

33

Grandey A A (2003) When the show must go on surface acting and deep acting as

determinants of emotional exhaustion and peer-rated service delivery Academy of

Management Journal 46 86-96

Gray JA (1999) Cognition emotion conscious experience and the brain In T Dalgleish and

MJ Power (Eds) Handbook of Cognition and Emotion (pp83-102) Chichester England

Wiley

Gross J (2002) Emotion regulation affective cognitive and social consequences

Psychophysiology 39 281

Gross J J amp John O P (2003) Individual differences in two emotion regulation processes

Implications for affect relationships and well-being Journal of Personality and Social

Psychology 85(2) 348-362

Gross J J amp Thompson R A (2007) Emotion regulation Conceptual foundations In J J

Gross (Ed) Handbook of emotion regulation New York NY Guilford Press

Isen A M Shalker T E Clark M amp Karp L (1978) Affect accessibility of material in

memory and behavior A cognitive loop Journal of Personality and Social Psychology

36 1-12

Johnson E amp Tversky A (1983) Affect generalization and the perception of risk Journal of

Personality and Social Psychology 45(1) 20-31

Kavanaugh D amp Bower G (1985) Mood and self-efficacy Impact of job and sadness on

perceived capabilities Cognitive Therapy and Research 9 507-525

Klein G A Calderwood R amp Clinton Cirocco A (1986) Rapid decision-making on the

fireground Human Factors and Ergonomics Society 30th Annual Meeting Vol 1 576-

580

Knorr-Cetina K amp Brugger U (2002) Traders Engagement with Markets A Postsocial

Relationship Theory Culture and Society 19(5-6) 161-185

Labouvie-Vief G (2003) Dynamic integration Affect cognition and the self in adulthood

Current Directions in Psychological Science 12 201-206

Lerner J S amp Keltner D (2001) Fear anger and risk Journal of Personality and Social

Psychology 81(1) 146-159

Lerner J S Small D A amp Loewenstein G (2004) Heart strings and purse strings Carryover

effects of emotions on economic decisions Psychological Science 15(5) 337-341

Lo A Repin D amp Steenbarger B (2005) Fear and greed in financial markets A clinical study

of day traders American Economic Review 95 352-359

Lo A W amp Repin D V (2002) The Psychophysiology of Real-Time Financial Risk

Processing Journal of Cognitive Neuroscience 14 323-339

MacKenzie D (2006) An Engine Not A Camera How Financial Models Shape Markets

Cambridge Mass MIT Press

Mayer JD amp Hanson A (1995) Mood-congruent judgment over time Personality and Social

Psychology Bulletin 21 237-244

Mayer JD DiPaolo M and Salovey P (1990) Perceiving affective content in ambiguous

visual stimuli a component of emotional intelligence Journal of Personality Assessment

54 772-781

Miller G (2003) The cognitive revolution a historical perspective Trends in Cognitive Science

7 141

Muraven M amp Baumeister R F (2000) Self-regulation and depletion of limited resources

Does self-control resemble a muscle Psychological Bulletin 126 247-259

Nicholson N (2000) Managing the Human Animal London ThomsonTexere

34

Peterson R L (2007) Affect and financial decision-making How neuroscience can inform

market participants The Journal of Behavioral Finance 8(2) 70-78

Pham M T (2004) The logic of feeling Journal of Consumer Psychology 14 360-369

Phelps E A (2006) Emotion and cognition Insights from studies of the human amygdala

Annual Review of Psychology 57 27-53

Sayer A (1997) Essentialism social constructionism and beyond The Sociological Review 45

453-487

Shapira Z amp Venezia I (2001) Patterns of behavior of professionally managed and

independent investors Journal of Banking and Finance 25 1573ndash1587

Schunk D amp Betsch C (2006) Explaining the heterogeneity in utility functions by individual

differences in decision modes Journal of Economic Psychology 27 386-401

Schwager J D (1993) Market Wizards Interviews with Top Traders New York Collins

Schwarz N amp Clore G L (1983) Mood misattribution and judgments of well-being

Informative and directive functions of affective states Journal of Personality and Social

Psychology 45 513-523

Seo M G Barrett L F amp Bartunek J M (2004) The role of affective experience in work

motivation Academy of Management Review 29 423-439

Seo M G amp Barrett L F (2007) Being emotional during decision makingmdashgood or bad An

empirical investigation The Academy of Management Journal 50 923-940

Shefrin H (2000) Beyond Greed and Fear Understanding Behavioral Finance and the

Psychology of Investing Boston MA Harvard Business School Press

Stokes A F Kemper K amp Kite K (1997) Aeronautical decision making cue recognition and

expertise under time pressure In C E Zsambok amp G Klein (Eds) Naturalistic Decision

Making pp 183-196 Mahwah NJ Erlbaum

Tamir M (2005) Dont worry be happy Neuroticism trait-consistent affect regulation

and performance Journal of Personality and Social Psychology 89 (3) 449 ndash

461

Thaler R H (1985) Mental accounting and consumer choice Marketing Science 4(3) 199-214

Thaler R H (1993) Advances In Behavioral Finance New York Russel Sage Foundation

Thaler R H (1999) Mental accounting matters Journal of Behavioral Decision Making 12(3)

183-206

Tiedens L amp Linton S (2001) Judgment under emotional certainty and uncertainty the effects

of specific emotions on information processing Journal of Personality and Social

Psychology 81(6) 973-988

Todd P M amp Gigerenzer G (2007) Environments that make us smart Ecological rationality

Current Directions in Psychological Science 16 167-171

Totterdell P Briner R B Parkinson B amp Reynolds S (1996) Fingerprinting time series

dynamic patterns in self-report and performance measures uncovered by a graphical non-

linear method British Journal of Psychology 87(1) 43-60

Weber M amp Welfens F (2008) Splitting the Disposition Effect Asymmetric Reactions

Towards bdquoSelling winners‟ and bdquoHolding Losers‟ Working Paper University of

Mannheim

Wright WF amp Bower GH (1992) Mood effects on subjective probability assessment

Organizational Behavior and Human Decision Processes 52 276ndash91

13

Analysis

The raw data were the full transcripts of all interviews We used a thematic analysis

approach which we judged to be particularly well suited to the present study As Braun and

Clarke (2006 78) note thematic analysis does not rest on a single epistemic position but can

span both realist and constructivist approaches We take the position that emotions have both a

measurable biological reality and exist in the realm of socially constructed personal experience in

which emotions have personal and social meaning

Data were open-coded by each author separately then in discussion using the NVIVO

program Common statements were identified and used as the basis for a first set of coding

categories which were subsequently refined and consolidated Coding categories were thus both

emergent from the interviews and drew on constructs identified in the literature (eg approaches

to emotion regulation) relevant to emerging themes Thus coding was both theoretical and

inductive As we analyzed the data and drew tentative conclusions we explicitly sought

disconfirming evidence to test the robustness of our insights In a later stage of analysis we

partitioned the sample into groups of low (lt5 years n=25) medium (5 to 10 years n=48) and

high experience (gt10 years N=45) and into groups of low (remunerationlt pound300k N=45) medium

(pound300k- pound500k N=34) and high expertise (gt pound500k N=38) We compare interview responses of

three specific groups inexperienced low paid traders (N=18) highly experienced but low paid

traders (N=15) and high paid traders (N=38) The remainder of the sample were medium

experience and pay There were no low experience high pay traders We chose the three

comparison groups to provide maximal contrast in differentiating the characteristics associated

with different levels of experience and expertise respectively

14

In Table 1 we summarize our key findings and the nature of the evidence for each finding

In the final column we note our sense of the strength of the evidence for each finding This

represents a qualitative conclusion arrived at though discussion between the authors and drawing

on quantity consistency importance and clarity of supporting data and existence of any

disconfirming evidence In the next section of the paper we discuss these findings and the

evidence for them in more detail Direct quotes are verbatim accompanied by the case number of

the respondent and their classification in terms of experience and pay level

TABLE 1 ABOUT HERE

TRADERSrsquo UNDERSTANDINGS OF EMOTION IN THEIR TRADING PRACTICE

Emotional experience and regulation

For many traders especially the less experienced trading is marked by significant and

persistent emotional responses to successes and setbacks It is relevant to note the distinction

between mood and emotion since both were relevant to traders Mood can be understood as a

relatively diffuse emotional climate which persists over time and not anchored to specific

situations or cognitions In contrast emotions typically have specific objects and give rise to

behavioral response tendencies relevant to those objects (Totterdell Briner et al 1996)

ldquoWhen you lose money you could sit down and cry Anybody who says you couldn‟t

isn‟t being honest with you Of course when it‟s good it‟s fantastic The highs and

lows of a trader‟s life are euphoria or absolute dismayrdquo 106 high experience

medium pay

While these emotional responses would often be triggered by specific events or series of

events in many cases the impact on mood would persist for significant periods with

consequences for subsequent trading behavior For example one manager described a trader

15

working for him as ―having been in the wilderness his confidence totally shattered for about

two years before slowly recovering from a string of losses Many talked about needing weeks or

even months to recover from the impact of major losses especially early in their careers Others

talked about the dangers of false confidence or euphoria which could persist for some time after a

big win

ldquoPeople get a bit arrogant when they have good times but this can be dangerous

because then they stop thinking as muchrdquo 18 medium experience medium pay

ldquoI tend to feel more cautious when losing moneyhellipIf I am having a down month I‟ll

look at trades which I would do if I was having a good month and say I don‟t like it

enough to take the risk on it I become more selective more risk averse and to do a

trade I need to see more than one reason why a trade will work and then might put it

on but not in a huge size When making money I can be more slack 29 high

experience high pay

However our data also suggest emotion regulation is critical to moderating the impact of

emotions on traderslsquo decision making Senior traders and trader managers frequently talked about

the way in which they had developed a capacity to regulate their own emotions and trade more

evenly regardless of success and setbacks

ldquoYou learn to be able to deal with emotions It doesn‟t get to me as much There

were situations when I was extremely stressed up and then you feel physically ill and

you really feel on the verge of throwing up But that was a long time ago and doesn‟t

happen so much now You have seen the ups and downs more You have experienced

them and in a way you are probably more prepared for it and you are aware that

every now and then it will happenhellip but it doesn‟t get to you all that much because

you are aware that it will happen 6 medium experience high pay

16

We examined emotion regulation and its relevance to performance further by considering

data from the three comparison groups (based on experience and pay) We noticed some

important differences in the way in which these groups discussed the interaction between

emotion trading and the use of intuition First there seemed to be notable differences in the

strategies employed for emotion regulation which we describe below in the language of the

Gross and Thompson model (2007) When asked directly about emotion traders in the low

experience group typically started by presenting themselves as fairly immune to the impact of

emotion on their trading However as the interview progressed they would often reveal rather

more vulnerability to emotions than they had claimed initially Take for example this trader who

had been trading for a little less than 4 years -

ldquoI‟m bit of a cold fish I don‟t think emotions greatly affect my decision-making If

you are making money you are achieving your objectivehellip

[But later]

hellipWhen you lose money it can be horrendous violent mood swings You don‟t know

what to do when you lose moneyrdquo 38 low experience low pay

There tended to be two responses types when these traders did talk about their emotions

Some in the low experience low pay group did not talk at all about actively managing their

emotions Others talked about removing themselves from situations when their emotions became

a problem (situation modification) or avoiding situations entirely which make them feel bad

(situation selection)

ldquoI think there is a strong emotional element to trading I think that anyone who‟s

doing it properly and has got their head screwed on is doing everything they can

consciously to overrule that and if I feel that I‟m trading emotionally I will walk off

17

the desk have a glass of water walk up and down the street and then come back and

make decisions when I‟m hopefully not emotionalrdquo 43 low experience low pay

Traders in the experienced group more commonly talked about strategies for emotion

regulation However the nature of these strategies tended to vary between the low paid and high

paid groups In the high experience low paid group traders seemed to find it hard to articulate

how they managed their emotions and the emotion regulation strategies they identified were

predominately situation avoidance situation modification and response modulation

ldquoIf you get two or three decisions wrong you find you might not take a risk for a

month until you build up your confidence There‟s definitely a lot of confidence

involvedrdquo 104 high experience low pay

ldquoI try and keep my emotions under tight controlrdquo 105 high experience low pay

There is a marked contrast in the discourse of the high performing traders who often

showed a greater willingness to reflect on their emotion-driven behavior (the two exceptions to

this were traders with whom we had only short interviews with little opportunity for extended

reflection rather than any denial of the role of emotion) Emotion regulation for these traders

tended to focus mainly on how they directed their attention (attentional deployment) and how

they framed experiences of loss and gain (cognitive change)

ldquoBig losses and big gains can swap around fairly quickly and once you understand

that then you stop concentrating on the loss and you start concentrating more on how

to make money back hellip One big trade is not going to make anyone and one big loss

doesn‟t destroy yourdquo 15 high experience high pay

ldquoExperience definitely helps having traded through the crash etc Youve seen

different scenarios and newer people its like oh my god its the end of the world

whereas there is life after death and so I think that type of experience helps It doesnt

18

necessarily help the new situation on what to do but it just helps your judgmentrdquo 55

high experience high pay

There was a notable absence of avoidant behavior in this group Several participants told

stories which implied a significant degree of persistence in the face of negative emotion

ldquoI had one very bad year from which I learned quite a lot I learned that the

overshooting can go on for a very long time it can be very painful you can hit risk

limits hellip I did not want to get out of the trades so kept the trades and then next year

they made more money than they lost I don‟t think I panicked but I was getting calls

from the CEO Reason prevailed in the end Emotionally it was not easy to cope

with There were times when the desk was down close to $100m I lost almost that

much in days I was under a lot of pressure from New York because they did not

understand my positions but in the end we managed to keep the positions and made

money the next year The hardest thing was persuading others that I had a good

traderdquo 14 high experience high pay

This willingness among some of the high performing traders to experience negative

emotion in order to achieve longer term goals is consistent with Labouvie-Vieflsquos (2003)

argument that positive self-development requires not just strategies to optimize positive affect

but also the ability to tolerate tension and negativity to achieve long term goals

However there may be another important reason why response modulation strategies are

maladaptive for traders As we have seen above while poorly regulated emotions carry over to

subsequent trading and risk biasing subsequent trading behavior emotion cues generated by

reactions to information relevant to current trading under time constraints play an important role

in guiding attention and rapidly choosing appropriate action Both poor regulation of non-

19

relevant emotions and recourse to the attempted suppression of all feeling run the risk of masking

these important cues

The Role of Managers in Emotion Regulation

Further evidence of the importance of emotions and their regulation to trader performance

came from interviews with trader managers A few managers described their role in primarily

technical terms focusing on risk management and personal supervision of problematic trades

However many of those we interviewed clearly saw regulating the emotions of traders who

worked for them as a key element in managing trader performance

ldquoI have to play the role of director of emotions in the sense that when they are down

you have to boost their morale and when they are too excited they want to do stupid

things I have to cool them downrdquo 119 senior manager

ldquoI care deeply because I have tremendous pride in the people herehellipThe stress is

generated by fear entirely and it‟s fear of what I guess everyone has their

insecurities whether it‟s being fired losing lots of money and appearing stupid in

front of their peer group Whatever it is it‟s definitely fear and if you can take the

fear out of the situation they perform betterrdquo 123 senior trader manager high

experience high pay

Many traders described such episodes of managerial intervention as crucial to their

learning and development For example-

ldquoI lost $1m in the first 10 days of the year This was at a time when if you made $1m

in a year that was huge I was devastated and my boss asked me for lunch at the

weekend - I thought that was the end of my career My boss said bdquoa lot of the guys

think you‟re OK but they are worried you are going to be afraid to trade that you‟re

20

going to be gun shy and lose your confidence We want you to know that we like you

and if you think you‟ve got to buy them buy them and if you‟ve got to sell them sell

them but whatever you do don‟t stop trading‟ So that was a huge relief Since then I

don‟t get too depressed about losing money although there are always good days

and bad daysrdquo 25 low experience medium performance

Other managers clearly gave thought to the relative strengths and weaknesses of more

intuitive versus more analytical traders in their decisions about matching traders to roles -

ldquoA gut trader should trade a liquid market - he might change his feel so he needs to

get out The analytical trader who thinks much more about what he‟s doing will

change their mind less often and trade with a different time frame A gut trader can

be bullish in the morning The analytical trader will look at something for a week

and then put on a position - less important to get in and out He doesn‟t need to be in

a liquid market - in an emerging market you need a more analytical traderrdquo 122

Manager

ldquoDerivatives are very quantitative and people think if you have a PhD you will be

very good because you have an understanding of options theory but this is not

always the case and you tend to overlook things Although you can put the

parameters into the model there are still a lot of things which are uncertain

Sometimes adding a more qualitative feel to it ndashbdquoyes that‟s what the model says but

the risk doesn‟t look right‟ hellip I tend to have a mixture of people on the desk - those

who are more quantitative and those who are more common sense or gut instinct

traders Having the blend is quite useful for bouncing ideasrdquo 124 Manager

These reflections have implications for management strategies in trading environments or

indeed any others where the main role of the operative is complex decision-making under

21

constraints of time and uncertain and incomplete information We consider these points further in

our discussion

Emotional Cues and the Use of Intuition

The second broad theme concerned the role of emotional cues in traderslsquo decision-

making Many of the traders discussed this aspect of emotion as intuition Traderslsquo own accounts

and conceptualizations of intuition fit well with Dane and Prattlsquos (200740) definition of intuition

as ―affectively charged judgments that arise through rapid non-conscious and holistic

associations For example -

ldquo[W]ithout a doubt some of the best bargains are the ones you dont do You know

theyre bad bargains You know It‟s a gut feel Youve looked at the playing field and

you just know this is a bad bargainrdquo 106 high experience moderate pay

Some of the traders see a more subtle and sophisticated role for emotions which represent

an unconscious drawing on experience -

ldquoI think many people do say theyre gut-feel traders but perhaps theyre not analyzing

what theyre actually thinking and theyre seeing a lot of customer flow and a lot of

buyers and they probably dont necessarily realize the reasons why they want to buy

But there are very good traders that say theyre trading off gut feel that I believe

actually have probably reasonable information reasonable thoughts behind it but

they wouldnt literally toss a coinrdquo 55 high experience high pay

Feelings are also seen as a kind of radar directing attention and shaping perceptions

around opportunities to enable them to be promptly seized

ldquoI think what a trader has to have is not necessarily this gut feeling but this nose for

opportunities If an opportunity comes along you have to be able to spot it and see it

22

and sometimes people you typically find in this business - an opportunity is there and

they cant see it and then its taken by someone else and its like oh yeah that was a

good idea but it is gonerdquo 58 high experience low pay

Not only do feelings act as a kind of radar directing attention but they do so in a way that

enables rapid decision making under time pressure As one trader noted -

ldquoTrading includes stuff which is beyond trading Trading is when you make decisions

involving financial risk that have two qualities you have to make them in someone

else‟s time schedule not your own and when you make a decision you have to be

confident when you have incomplete or imperfect information and therefore there

must be some kind of intuitive or qualitative elementrdquo 121 high experience high pay

Experienced traders made much more reference to intuition or gut feellsquo as they often

phrased it than less experienced traders However again there were important differences

between low and high paid traders in the high experience group Low paid traders who talked

about the use of intuition often talked of it in terms of a rather mysterious process You either had

a feeling or not For example

ldquoIt‟s almost like a sixth sense Something comes over you and you feel like - yes I

know they‟re going to be looking to buy these later on or looking to sell these later

onrdquo 116 high experience low pay

By contrast the top paid group tended to reflect critically about the origins of their

intuitions and to bring them together with more objective information -

ldquoIf I do fancy a stock - you have a feeling it feels right it has done nothing for like

two or three months and you‟ve seen sellers and they start to dwindle and it is just

stagnant and then you have a look on the charts you refer to the technical side as

well as the emotional side of the trade So you know a combination of technical and

23

emotional as well as what the analyst thinks as well so you sort of bring the

instruments you have available to you to make the decision rather than the snap

[snaps his finger] I fancy buying thatrdquo 101 high experience high pay

ldquoI may examine opportunities based on intuition that something is going to happen

but the decision is based on something I think is rationalrdquo 68 medium experience

high pay

Reported use of intuition does seem to increase with trader experience However traderslsquo

engagement with their feelings is qualitatively different between low and high performers High

performing traders seem to engage with their intuitions at a meta-cognitive level and make

judgments about the relevance of these feelings to the decision at hand This is consistent with

the growing literature on expertise which points to experience as a necessary but insufficient

condition for the development of expertise and points to the role of extended critical engagement

with practice in developing expertise (Ericsson 2006 Ericsson Krampe amp Tesch-Roemer

1993)

Traders were not universally positive about the role of intuition in market decision making

Some believed reliance on such feelings yields poor outcomes -

ldquoMany traders feel that models have been developed by academics who do not know

markets and [traders] think that gut feeling is more important My experience is that

this is 100 wrong and computers can make better decisions than tradersrdquo 37

medium experience medium pay

Overall however the data support a picture of expert traders having a meta-cognitive

engagement with emotion regulation This process entails discrimination between emotions in

terms of their relevance to the decision at hand and effective strategies for emotion regulation to

enhance performance

24

Empathy

The third identified theme was empathy monitoring own emotions as information

about what other market players might be feeling Only five traders explicitly described

using their own capacity for empathy as a decision making tool Although not frequent in

our data these examples are important illustrating that there is a path for traders beyond

simply seeking to eliminate or reduce the intensity of their emotions These traders

fostered feelings as a source of information about other market actors which they managed

and used in a self-aware analysis One trader described using his own fear as an indicator

of fear in the market Another described actively imagining the feelings of other market

actors ―trying to put myself in [the Bank of England Governorlsquos] feet to develop a feel for

how he feels and thinks 14 high experience high pay

Three traders talked about an emotional affinity with the feelings of people in

national markets (Spain 34 high experience medium pay Italy 70 medium experience

low pay and Japan 117 high experience medium pay) with whom they shared a common

culture and propensity to react emotionally in similar ways to the same market events This

group was small but these data broaden the picture of traders reasoning with emotionlsquo

and offer a potentially rich and fruitful avenue for future research

DISCUSSION AND CONCLUSIONS

To ask whether emotion disturbs or aids traderslsquo decision-making is to ask the wrong

question Traderslsquo emotions and cognition are inextricably linked Therefore a more productive

question to ask in this context is whether there are more or less effective strategies for managing

and using emotion in financial decision-making This has been the thrust of our analysis which

25

sought to move beyond previous work that simply characterizes emotional arousal as detrimental

to performance (eg Lo et al 2005 Schunk and Bersh 2006) The study contributes to our

understanding of the role of emotions in work and decision-making in several distinct ways In

contributing to our understanding of the role of emotion at work this study has particular

relevance in that it considers a work domain which has been theorized as strongly normatively

rational as opposed to a work domain (such as negotiation or customer service) where

performance is primarily dependent on effective social interaction However it is clear from this

study that even within such an analysis-intensive domain as financial trading emotion plays a

central role Traders and their managers are frequently preoccupied with the effective regulation

and use of emotions in their work Our work points to the value of a more nuanced understanding

which considers the role of emotions in decision-making the differential impact of various

emotion regulation strategies the conditions under which gut-feellsquo may support effective

decision-making and the role of empathic responses in understanding the behavior of other

market actors

Effective emotion regulation seems to be a critical success factor in trading for our

findings suggest that the strategies for emotion regulation adopted by expert higher performing

traders are qualitatively different from those of lower performing traders In particular higher

performers are more inclined to regulate emotions through attentional deployment and cognitive

change and may display a willingness to cope with negative feelings in the interests of

maintaining objectivity and pursuing longer term goals The kind of attention and appraisal-

focused emotion regulation strategies used by high-performing traders do not seem to be too

cognitively expensive and are effective in reducing negative experience of emotion (Gross

2002) By contrast less expert traders engage either in avoidant behaviors such as walking

away from the desk or invest significant cognitive effort in modulating their emotional

26

responses This extends previous findings (eg Grandey 2003) concerning the performance

benefits of antecedent versus response-focused emotion regulation in the context of emotion

labor to the very different context of financial decision-making Our findings also suggest that

willingness to endure negative feelings in pursuit of long-term goals may be more adaptive than

purely defensive strategies aimed at maintaining positive feelings (Labouvie-Vief 2003 Tamir

2005)

This study also provides evidence that more effective emotion regulation strategies can be

learned in a financial decision-making context While an individuallsquos preferred approach to

emotion regulation is likely to be influenced by personality traits neuroticism and extroversion in

particular (Gross amp John 2003) our interviews with traders and their managers also point to the

importance of traderslsquo learned strategies for emotion regulation Importantly our study also

suggests that defensive emotion regulation strategies may be problematic because they reduce

opportunities to exercise expert intuition

These findings go well beyond prior research on emotion regulation and performance

(eg Grandey 2003) which has a primary focus on performance in the context of interpersonal

interaction Our findings uniquely address the performance of professional traders for whom

performance is not primarily dependent on interpersonal interaction and which has been

theorized as strongly rational involving the selection of optimal strategies in the face of complex

cognitive demands and requiring attention to a large volume of information with uncertain

relevance

Turning to intuition traders in our study mirror the balance of opinion in the research

literature on intuition They are equivocal about whether feelings and hunches about appropriate

courses of action lead to better or worse outcomes than purely rational analysis There were

strong feelings on both sides with traders being quite evenly divided between the two camps

27

However again our study suggests the importance of a more nuanced approach than simply

asking whether reliance on intuition is good or bad and points towards the conditions in which

reliance on intuitive judgment may be more and less effective The findings suggest that one

characteristic of higher performing traders may be a greater willingness to reflect critically about

their intuitions and feelings about trading These traders often reported relying on intuition but

they tend to weigh their feelings critically alongside other evidence and to reflect about the

provenance of those feelings Lower performing traders may rely on feelings alone and show

less propensity to think critically about the source of hunches This reflection by expert traders

about the provenance of feelings may be particularly salient given Schwarz and Clorelsquos (1983

2003) finding that the impact of emotions on behavior is reduced or disappears when the

relevance of those emotions is explicitly called into question

That traderslsquo reliance on affective cues in decision-making can support effective

performance is consistent with Damasiolsquos observation that deciding advantageously depends on

the use of affective cues in both learning and deciding (Bechara et al 1997 Damasio 1994)

There is increasing evidence that humans are naturally proficient in the ability to acquire

expertise and that encapsulation of experience in expert intuition and perception via system one

provides a means of by-passing cognitive limits (Ericsson 2006) The nature of expertise could

counteract the inherent environmental uncertainties that Tiedens and Linton (2001) identified as

leading to more conscious appraisal of information While not an unequivocal result our finding

of greater critical engagement among higher performing traders with intuitions and their more

sophisticated deployment of intuition in combination with analysis suggests an important

direction for future research

The small number of accounts of traders monitoring their own emotions as a source of

information about the emotions of other market actors was intriguing These data suggest a

28

possibly productive avenue for future research We do not have evidence of performance

outcomes of predictive uses of empathy in this manner but our findings are consistent with

arguments that the evolution of the human brain has been significantly driven by the need to

predict the behavior of other humans often via subtle cues (eg Nicholson 2000)

We suggest that the identification of links between decision-making performance and

emotion regulation in this study has important implications for theory development in two key

fields First while somewhat tacit in much of the literature the implication of many claims in the

decision-making and behavioral finance literatures is that a range of key decision-making biases

are underpinned by mechanisms which involve emotion processes One relevant explicit example

is Thalerlsquos (1985 1999) account of the role of hedonic editinglsquo in mental accounting and the

disposition effect (the tendency to hold losing assets longer than winning assets) This explains

key biases in terms of the desire to maintain positive hedonic tone There is evidence too of

interpersonal variation in propensity to exhibit such biases for example investors vary in their

propensity to exhibit the disposition effect (Shapira amp Venezia 2001 Weber amp Welfens 2008)

In this study we have seen that traders seek to regulate emotions in order to avoid decision biases

and that higher performing traders typically exhibit more sophisticated emotion regulation

strategies This suggests that it would be productive to investigate the role of emotion regulation

as one key source of interpersonal variation in susceptibility to a range of decision biases

A second implication concerns the role of emotion in expert performance While much

attention has been paid to the nature of cognition in expert performance the expertise literature

hardly considers the role of emotion For example examining the index of the Cambridge

Handbook of Expertise and Expert Performance (Ericsson et al 2006) reveals very few

references to emotion and these are peripheral to the main arguments of the chapters which

contain them Our research suggests first that effective emotion regulation may be an important

29

facet of expert performance and second that greater attention should be paid to the interactions

between emotion emotion regulation and expert intuition Further research could test the

proposition that effective expert intuition is reduced by reliance on defensive emotion regulation

strategies

While our study points to the importance of intuition in traderslsquo work it may be that the

relative importance of intuition and analysis vary with task characteristics such as time span of

decision-making Certainly this seemed to be the view of several senior managers with

responsibility for allocating traders to trading roles The interplay that expert traders described

between intuition and analysis is also intriguing The importance of context to the role of affect

in decision-making has been noted in prior research (Forgas amp George 2001) Further research

could usefully explore this aspect of traderslsquo expertise

This study also contains some potentially important implications for practice First it

points to the importance of learned strategies for emotion regulation and the need for effective

support for their development Second our data directly and indirectly point to the key role of

management in this process Our findings suggest that there may be considerable benefits to

skilled managerial interventions that help to steer effective emotion regulation and support

inexperienced traders in developing emotion regulation skills Additionally managers may be

able to help traders to understand the productive role that critically engaged experience-based

intuition may play in decision-making Our evidence suggests that many high performing traders

deploy a reflective and critical approach to the use and development of intuition well-founded in

experience Managers could help to guide this process through coaching The contextual

dependence of high quality intuitions suggests they are quite domain specific and may not

transfer across contexts As several informants told us this is especially true for traders operating

under different market conditions

30

We heard repeated concerns from senior managers who worried about traders who had

not seen a bear market and would not operate well when that occurred We also heard many

stories of people transferring between trading areas and needing time to re-contextualize

expertise before their intuitions could be considered reliable Thus managers have a role in

helping traders to extend the boundaries of their expertise Given recent events in financial

markets our findings may be relevant to an understanding of how traders react under massively

changed trading conditions and how those reactions might either contribute to or result from

market volatility

This research has some important limitations First although we have argued for the

importance of an account of emotion that includes the experience of emotion as Pham (2004

368) notes the affective system is focused on the present Thus people can be poor at recalling or

predicting emotions There are limits to the human capacity to introspect on emotion processes

and to recall the experience of emotion These limits are also subject to wide individual

differences The capacity for introspection and recall will also vary between individuals For this

reason studies such as ours need to be complemented with more physiologically based research

as well as further qualitative and quantitative studies

Second as in all work contexts traders subscribe to norms of socially sanctioned

behavior and to common narratives about the nature of their work We have not treated emotional

labor as a primary component of traderslsquo work and performance The majority of work

interactions are carried out through highly abbreviated electronic exchanges which provide a poor

medium for the communication of emotion However there is a sense in which traders engage in

emotional labor since especially for novices there are social pressures to comply with display

rules which emphasize the avoidance of displays of strong emotion One common narrative

thread that ran though many traderslsquo accounts of their work was a representation of trading work

31

as principally concerned with rational analysis from which emotions are a dangerous distraction

This narrative seemed particularly strong in the accounts of less experienced traders Although as

we have seen the mask would often slip as they discussed their work Some traderslsquo accounts

were clearly colored by a desire to conform to this mode of self-presentation In consequence it is

possible that in our interviews and during data analysis we were at times unable to distinguish

effectively between defensive denial of emotion and effective regulation of emotion This would

be another avenue for future research

To conclude we know that emotions are a rich source of experience in everyday life but

at the same time in work contexts they can be a source of vulnerability a wayward influence over

judgment and a source of disturbance to process The more ―rational-economic such

environments are the more likely we are to hold such beliefs (Nicholson 2000) Our research

illustrates that this position is false or at best short-sighted In the hyper-rational world of

trading in financial markets we did find some evidence that emotions disturbed performance but

mostly among the inexperienced and un-reflective traders The best traders are able to regulate

emotions effectively and incorporate relevant emotions as information ndash signals or a kind of

radar that contain information about risks what is going on in the minds of others and the weight

and relevance to be accorded to onelsquos own past experience

32

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trait construct and stereotype activation on action Journal of Personality and Social

Psychology 71 230-244

Baumeister R F Bratslavsky E Muraven M amp Tice D M (1998) Ego depletion Is the

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1265

Bechara A Damasio A Tranel D amp Damasio A R (1997) Deciding advantageously before

knowing the advantageous strategy Science 275 1293-1295

Bower G H (1981) Mood and memory American Psychologist 36 129 ndash 148

Bower G H (1991) Mood congruity of social judgments In J P Forgas (Ed) Emotion and

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Braun V amp Clarke V (2006) Using thematic analysis in psychology Qualitative Research in

Psychology 3(2) 77-101

Buck R (1999) The biological affects a typology Psychological Reveiw 106 301-336

Damasio A R (1994) Descartes‟ error Emotion reason and the human brain New York

Putnam

Dane E amp Pratt M G (2007) Exploring intuition and its role in managerial decision making

The Academy of Management Review 32 33-54

De Bondt W Palm F amp Wolff C (2004) Introduction to the special issue on behavioral

finance Journal of Empirical Finance 11 423-427

Dreyfus H amp Dreyfus S (2005) Expertise in real world contexts Organization Studies 26

779-792

Epstein S Pacini R Denes-Raj V amp Heier H (1996) Individual differences in intuitive-

experiential and analytical-rational thinking styles Journal of Personality and Social

Psychology 71 390-405

Ericsson K A Krampe R T amp Tesch-Roemer C (1993) The role of deliberate practice in the

acquisition of expert performance Psychological Review 100 363-406

Ericsson K A (2006) An introduction to the Cambridge Handbook of Expertise and Expert

Performance its development organization and content In K A Ericsson amp N Charness

amp P J Feltovich amp R R Hoffman (Eds) The Cambridge Handbook of Expertise and

Expert Performance 1st ed 3-20 Cambridge Cambridge University Press

Fama E F (1991) Efficient Capital Markets II The Journal of Finance 46 1575-1617

Fama E F (1998) Market efficiency long-term returns and behavioral finance Journal of

Financial Economics Vol 49 283-306

Fenton-OCreevy M Nicholson N Soane E amp Willman P (2005) Traders Risks Decisions

and Management in Financial Markets Oxford Oxford University Press

Finucane M L Alhakami A Slovic P amp Johnson S M (2000) The affect heuristic in

judgments of risks and benefits Journal of Behavioral Decision Making 13(1) 1-17

Forgas JP amp George JM (2001) Affective influences on judgments and behavior in

organizations An information processing perspective Organizational Behavior and

Human Decision Processes 86(1) 3-34

Grandey AA (2000) Emotion Regulation in the Workplace A new way to conceptualize

Emotional Labor Journal of Occupational Health Psychology 5(1) 95-110

33

Grandey A A (2003) When the show must go on surface acting and deep acting as

determinants of emotional exhaustion and peer-rated service delivery Academy of

Management Journal 46 86-96

Gray JA (1999) Cognition emotion conscious experience and the brain In T Dalgleish and

MJ Power (Eds) Handbook of Cognition and Emotion (pp83-102) Chichester England

Wiley

Gross J (2002) Emotion regulation affective cognitive and social consequences

Psychophysiology 39 281

Gross J J amp John O P (2003) Individual differences in two emotion regulation processes

Implications for affect relationships and well-being Journal of Personality and Social

Psychology 85(2) 348-362

Gross J J amp Thompson R A (2007) Emotion regulation Conceptual foundations In J J

Gross (Ed) Handbook of emotion regulation New York NY Guilford Press

Isen A M Shalker T E Clark M amp Karp L (1978) Affect accessibility of material in

memory and behavior A cognitive loop Journal of Personality and Social Psychology

36 1-12

Johnson E amp Tversky A (1983) Affect generalization and the perception of risk Journal of

Personality and Social Psychology 45(1) 20-31

Kavanaugh D amp Bower G (1985) Mood and self-efficacy Impact of job and sadness on

perceived capabilities Cognitive Therapy and Research 9 507-525

Klein G A Calderwood R amp Clinton Cirocco A (1986) Rapid decision-making on the

fireground Human Factors and Ergonomics Society 30th Annual Meeting Vol 1 576-

580

Knorr-Cetina K amp Brugger U (2002) Traders Engagement with Markets A Postsocial

Relationship Theory Culture and Society 19(5-6) 161-185

Labouvie-Vief G (2003) Dynamic integration Affect cognition and the self in adulthood

Current Directions in Psychological Science 12 201-206

Lerner J S amp Keltner D (2001) Fear anger and risk Journal of Personality and Social

Psychology 81(1) 146-159

Lerner J S Small D A amp Loewenstein G (2004) Heart strings and purse strings Carryover

effects of emotions on economic decisions Psychological Science 15(5) 337-341

Lo A Repin D amp Steenbarger B (2005) Fear and greed in financial markets A clinical study

of day traders American Economic Review 95 352-359

Lo A W amp Repin D V (2002) The Psychophysiology of Real-Time Financial Risk

Processing Journal of Cognitive Neuroscience 14 323-339

MacKenzie D (2006) An Engine Not A Camera How Financial Models Shape Markets

Cambridge Mass MIT Press

Mayer JD amp Hanson A (1995) Mood-congruent judgment over time Personality and Social

Psychology Bulletin 21 237-244

Mayer JD DiPaolo M and Salovey P (1990) Perceiving affective content in ambiguous

visual stimuli a component of emotional intelligence Journal of Personality Assessment

54 772-781

Miller G (2003) The cognitive revolution a historical perspective Trends in Cognitive Science

7 141

Muraven M amp Baumeister R F (2000) Self-regulation and depletion of limited resources

Does self-control resemble a muscle Psychological Bulletin 126 247-259

Nicholson N (2000) Managing the Human Animal London ThomsonTexere

34

Peterson R L (2007) Affect and financial decision-making How neuroscience can inform

market participants The Journal of Behavioral Finance 8(2) 70-78

Pham M T (2004) The logic of feeling Journal of Consumer Psychology 14 360-369

Phelps E A (2006) Emotion and cognition Insights from studies of the human amygdala

Annual Review of Psychology 57 27-53

Sayer A (1997) Essentialism social constructionism and beyond The Sociological Review 45

453-487

Shapira Z amp Venezia I (2001) Patterns of behavior of professionally managed and

independent investors Journal of Banking and Finance 25 1573ndash1587

Schunk D amp Betsch C (2006) Explaining the heterogeneity in utility functions by individual

differences in decision modes Journal of Economic Psychology 27 386-401

Schwager J D (1993) Market Wizards Interviews with Top Traders New York Collins

Schwarz N amp Clore G L (1983) Mood misattribution and judgments of well-being

Informative and directive functions of affective states Journal of Personality and Social

Psychology 45 513-523

Seo M G Barrett L F amp Bartunek J M (2004) The role of affective experience in work

motivation Academy of Management Review 29 423-439

Seo M G amp Barrett L F (2007) Being emotional during decision makingmdashgood or bad An

empirical investigation The Academy of Management Journal 50 923-940

Shefrin H (2000) Beyond Greed and Fear Understanding Behavioral Finance and the

Psychology of Investing Boston MA Harvard Business School Press

Stokes A F Kemper K amp Kite K (1997) Aeronautical decision making cue recognition and

expertise under time pressure In C E Zsambok amp G Klein (Eds) Naturalistic Decision

Making pp 183-196 Mahwah NJ Erlbaum

Tamir M (2005) Dont worry be happy Neuroticism trait-consistent affect regulation

and performance Journal of Personality and Social Psychology 89 (3) 449 ndash

461

Thaler R H (1985) Mental accounting and consumer choice Marketing Science 4(3) 199-214

Thaler R H (1993) Advances In Behavioral Finance New York Russel Sage Foundation

Thaler R H (1999) Mental accounting matters Journal of Behavioral Decision Making 12(3)

183-206

Tiedens L amp Linton S (2001) Judgment under emotional certainty and uncertainty the effects

of specific emotions on information processing Journal of Personality and Social

Psychology 81(6) 973-988

Todd P M amp Gigerenzer G (2007) Environments that make us smart Ecological rationality

Current Directions in Psychological Science 16 167-171

Totterdell P Briner R B Parkinson B amp Reynolds S (1996) Fingerprinting time series

dynamic patterns in self-report and performance measures uncovered by a graphical non-

linear method British Journal of Psychology 87(1) 43-60

Weber M amp Welfens F (2008) Splitting the Disposition Effect Asymmetric Reactions

Towards bdquoSelling winners‟ and bdquoHolding Losers‟ Working Paper University of

Mannheim

Wright WF amp Bower GH (1992) Mood effects on subjective probability assessment

Organizational Behavior and Human Decision Processes 52 276ndash91

14

In Table 1 we summarize our key findings and the nature of the evidence for each finding

In the final column we note our sense of the strength of the evidence for each finding This

represents a qualitative conclusion arrived at though discussion between the authors and drawing

on quantity consistency importance and clarity of supporting data and existence of any

disconfirming evidence In the next section of the paper we discuss these findings and the

evidence for them in more detail Direct quotes are verbatim accompanied by the case number of

the respondent and their classification in terms of experience and pay level

TABLE 1 ABOUT HERE

TRADERSrsquo UNDERSTANDINGS OF EMOTION IN THEIR TRADING PRACTICE

Emotional experience and regulation

For many traders especially the less experienced trading is marked by significant and

persistent emotional responses to successes and setbacks It is relevant to note the distinction

between mood and emotion since both were relevant to traders Mood can be understood as a

relatively diffuse emotional climate which persists over time and not anchored to specific

situations or cognitions In contrast emotions typically have specific objects and give rise to

behavioral response tendencies relevant to those objects (Totterdell Briner et al 1996)

ldquoWhen you lose money you could sit down and cry Anybody who says you couldn‟t

isn‟t being honest with you Of course when it‟s good it‟s fantastic The highs and

lows of a trader‟s life are euphoria or absolute dismayrdquo 106 high experience

medium pay

While these emotional responses would often be triggered by specific events or series of

events in many cases the impact on mood would persist for significant periods with

consequences for subsequent trading behavior For example one manager described a trader

15

working for him as ―having been in the wilderness his confidence totally shattered for about

two years before slowly recovering from a string of losses Many talked about needing weeks or

even months to recover from the impact of major losses especially early in their careers Others

talked about the dangers of false confidence or euphoria which could persist for some time after a

big win

ldquoPeople get a bit arrogant when they have good times but this can be dangerous

because then they stop thinking as muchrdquo 18 medium experience medium pay

ldquoI tend to feel more cautious when losing moneyhellipIf I am having a down month I‟ll

look at trades which I would do if I was having a good month and say I don‟t like it

enough to take the risk on it I become more selective more risk averse and to do a

trade I need to see more than one reason why a trade will work and then might put it

on but not in a huge size When making money I can be more slack 29 high

experience high pay

However our data also suggest emotion regulation is critical to moderating the impact of

emotions on traderslsquo decision making Senior traders and trader managers frequently talked about

the way in which they had developed a capacity to regulate their own emotions and trade more

evenly regardless of success and setbacks

ldquoYou learn to be able to deal with emotions It doesn‟t get to me as much There

were situations when I was extremely stressed up and then you feel physically ill and

you really feel on the verge of throwing up But that was a long time ago and doesn‟t

happen so much now You have seen the ups and downs more You have experienced

them and in a way you are probably more prepared for it and you are aware that

every now and then it will happenhellip but it doesn‟t get to you all that much because

you are aware that it will happen 6 medium experience high pay

16

We examined emotion regulation and its relevance to performance further by considering

data from the three comparison groups (based on experience and pay) We noticed some

important differences in the way in which these groups discussed the interaction between

emotion trading and the use of intuition First there seemed to be notable differences in the

strategies employed for emotion regulation which we describe below in the language of the

Gross and Thompson model (2007) When asked directly about emotion traders in the low

experience group typically started by presenting themselves as fairly immune to the impact of

emotion on their trading However as the interview progressed they would often reveal rather

more vulnerability to emotions than they had claimed initially Take for example this trader who

had been trading for a little less than 4 years -

ldquoI‟m bit of a cold fish I don‟t think emotions greatly affect my decision-making If

you are making money you are achieving your objectivehellip

[But later]

hellipWhen you lose money it can be horrendous violent mood swings You don‟t know

what to do when you lose moneyrdquo 38 low experience low pay

There tended to be two responses types when these traders did talk about their emotions

Some in the low experience low pay group did not talk at all about actively managing their

emotions Others talked about removing themselves from situations when their emotions became

a problem (situation modification) or avoiding situations entirely which make them feel bad

(situation selection)

ldquoI think there is a strong emotional element to trading I think that anyone who‟s

doing it properly and has got their head screwed on is doing everything they can

consciously to overrule that and if I feel that I‟m trading emotionally I will walk off

17

the desk have a glass of water walk up and down the street and then come back and

make decisions when I‟m hopefully not emotionalrdquo 43 low experience low pay

Traders in the experienced group more commonly talked about strategies for emotion

regulation However the nature of these strategies tended to vary between the low paid and high

paid groups In the high experience low paid group traders seemed to find it hard to articulate

how they managed their emotions and the emotion regulation strategies they identified were

predominately situation avoidance situation modification and response modulation

ldquoIf you get two or three decisions wrong you find you might not take a risk for a

month until you build up your confidence There‟s definitely a lot of confidence

involvedrdquo 104 high experience low pay

ldquoI try and keep my emotions under tight controlrdquo 105 high experience low pay

There is a marked contrast in the discourse of the high performing traders who often

showed a greater willingness to reflect on their emotion-driven behavior (the two exceptions to

this were traders with whom we had only short interviews with little opportunity for extended

reflection rather than any denial of the role of emotion) Emotion regulation for these traders

tended to focus mainly on how they directed their attention (attentional deployment) and how

they framed experiences of loss and gain (cognitive change)

ldquoBig losses and big gains can swap around fairly quickly and once you understand

that then you stop concentrating on the loss and you start concentrating more on how

to make money back hellip One big trade is not going to make anyone and one big loss

doesn‟t destroy yourdquo 15 high experience high pay

ldquoExperience definitely helps having traded through the crash etc Youve seen

different scenarios and newer people its like oh my god its the end of the world

whereas there is life after death and so I think that type of experience helps It doesnt

18

necessarily help the new situation on what to do but it just helps your judgmentrdquo 55

high experience high pay

There was a notable absence of avoidant behavior in this group Several participants told

stories which implied a significant degree of persistence in the face of negative emotion

ldquoI had one very bad year from which I learned quite a lot I learned that the

overshooting can go on for a very long time it can be very painful you can hit risk

limits hellip I did not want to get out of the trades so kept the trades and then next year

they made more money than they lost I don‟t think I panicked but I was getting calls

from the CEO Reason prevailed in the end Emotionally it was not easy to cope

with There were times when the desk was down close to $100m I lost almost that

much in days I was under a lot of pressure from New York because they did not

understand my positions but in the end we managed to keep the positions and made

money the next year The hardest thing was persuading others that I had a good

traderdquo 14 high experience high pay

This willingness among some of the high performing traders to experience negative

emotion in order to achieve longer term goals is consistent with Labouvie-Vieflsquos (2003)

argument that positive self-development requires not just strategies to optimize positive affect

but also the ability to tolerate tension and negativity to achieve long term goals

However there may be another important reason why response modulation strategies are

maladaptive for traders As we have seen above while poorly regulated emotions carry over to

subsequent trading and risk biasing subsequent trading behavior emotion cues generated by

reactions to information relevant to current trading under time constraints play an important role

in guiding attention and rapidly choosing appropriate action Both poor regulation of non-

19

relevant emotions and recourse to the attempted suppression of all feeling run the risk of masking

these important cues

The Role of Managers in Emotion Regulation

Further evidence of the importance of emotions and their regulation to trader performance

came from interviews with trader managers A few managers described their role in primarily

technical terms focusing on risk management and personal supervision of problematic trades

However many of those we interviewed clearly saw regulating the emotions of traders who

worked for them as a key element in managing trader performance

ldquoI have to play the role of director of emotions in the sense that when they are down

you have to boost their morale and when they are too excited they want to do stupid

things I have to cool them downrdquo 119 senior manager

ldquoI care deeply because I have tremendous pride in the people herehellipThe stress is

generated by fear entirely and it‟s fear of what I guess everyone has their

insecurities whether it‟s being fired losing lots of money and appearing stupid in

front of their peer group Whatever it is it‟s definitely fear and if you can take the

fear out of the situation they perform betterrdquo 123 senior trader manager high

experience high pay

Many traders described such episodes of managerial intervention as crucial to their

learning and development For example-

ldquoI lost $1m in the first 10 days of the year This was at a time when if you made $1m

in a year that was huge I was devastated and my boss asked me for lunch at the

weekend - I thought that was the end of my career My boss said bdquoa lot of the guys

think you‟re OK but they are worried you are going to be afraid to trade that you‟re

20

going to be gun shy and lose your confidence We want you to know that we like you

and if you think you‟ve got to buy them buy them and if you‟ve got to sell them sell

them but whatever you do don‟t stop trading‟ So that was a huge relief Since then I

don‟t get too depressed about losing money although there are always good days

and bad daysrdquo 25 low experience medium performance

Other managers clearly gave thought to the relative strengths and weaknesses of more

intuitive versus more analytical traders in their decisions about matching traders to roles -

ldquoA gut trader should trade a liquid market - he might change his feel so he needs to

get out The analytical trader who thinks much more about what he‟s doing will

change their mind less often and trade with a different time frame A gut trader can

be bullish in the morning The analytical trader will look at something for a week

and then put on a position - less important to get in and out He doesn‟t need to be in

a liquid market - in an emerging market you need a more analytical traderrdquo 122

Manager

ldquoDerivatives are very quantitative and people think if you have a PhD you will be

very good because you have an understanding of options theory but this is not

always the case and you tend to overlook things Although you can put the

parameters into the model there are still a lot of things which are uncertain

Sometimes adding a more qualitative feel to it ndashbdquoyes that‟s what the model says but

the risk doesn‟t look right‟ hellip I tend to have a mixture of people on the desk - those

who are more quantitative and those who are more common sense or gut instinct

traders Having the blend is quite useful for bouncing ideasrdquo 124 Manager

These reflections have implications for management strategies in trading environments or

indeed any others where the main role of the operative is complex decision-making under

21

constraints of time and uncertain and incomplete information We consider these points further in

our discussion

Emotional Cues and the Use of Intuition

The second broad theme concerned the role of emotional cues in traderslsquo decision-

making Many of the traders discussed this aspect of emotion as intuition Traderslsquo own accounts

and conceptualizations of intuition fit well with Dane and Prattlsquos (200740) definition of intuition

as ―affectively charged judgments that arise through rapid non-conscious and holistic

associations For example -

ldquo[W]ithout a doubt some of the best bargains are the ones you dont do You know

theyre bad bargains You know It‟s a gut feel Youve looked at the playing field and

you just know this is a bad bargainrdquo 106 high experience moderate pay

Some of the traders see a more subtle and sophisticated role for emotions which represent

an unconscious drawing on experience -

ldquoI think many people do say theyre gut-feel traders but perhaps theyre not analyzing

what theyre actually thinking and theyre seeing a lot of customer flow and a lot of

buyers and they probably dont necessarily realize the reasons why they want to buy

But there are very good traders that say theyre trading off gut feel that I believe

actually have probably reasonable information reasonable thoughts behind it but

they wouldnt literally toss a coinrdquo 55 high experience high pay

Feelings are also seen as a kind of radar directing attention and shaping perceptions

around opportunities to enable them to be promptly seized

ldquoI think what a trader has to have is not necessarily this gut feeling but this nose for

opportunities If an opportunity comes along you have to be able to spot it and see it

22

and sometimes people you typically find in this business - an opportunity is there and

they cant see it and then its taken by someone else and its like oh yeah that was a

good idea but it is gonerdquo 58 high experience low pay

Not only do feelings act as a kind of radar directing attention but they do so in a way that

enables rapid decision making under time pressure As one trader noted -

ldquoTrading includes stuff which is beyond trading Trading is when you make decisions

involving financial risk that have two qualities you have to make them in someone

else‟s time schedule not your own and when you make a decision you have to be

confident when you have incomplete or imperfect information and therefore there

must be some kind of intuitive or qualitative elementrdquo 121 high experience high pay

Experienced traders made much more reference to intuition or gut feellsquo as they often

phrased it than less experienced traders However again there were important differences

between low and high paid traders in the high experience group Low paid traders who talked

about the use of intuition often talked of it in terms of a rather mysterious process You either had

a feeling or not For example

ldquoIt‟s almost like a sixth sense Something comes over you and you feel like - yes I

know they‟re going to be looking to buy these later on or looking to sell these later

onrdquo 116 high experience low pay

By contrast the top paid group tended to reflect critically about the origins of their

intuitions and to bring them together with more objective information -

ldquoIf I do fancy a stock - you have a feeling it feels right it has done nothing for like

two or three months and you‟ve seen sellers and they start to dwindle and it is just

stagnant and then you have a look on the charts you refer to the technical side as

well as the emotional side of the trade So you know a combination of technical and

23

emotional as well as what the analyst thinks as well so you sort of bring the

instruments you have available to you to make the decision rather than the snap

[snaps his finger] I fancy buying thatrdquo 101 high experience high pay

ldquoI may examine opportunities based on intuition that something is going to happen

but the decision is based on something I think is rationalrdquo 68 medium experience

high pay

Reported use of intuition does seem to increase with trader experience However traderslsquo

engagement with their feelings is qualitatively different between low and high performers High

performing traders seem to engage with their intuitions at a meta-cognitive level and make

judgments about the relevance of these feelings to the decision at hand This is consistent with

the growing literature on expertise which points to experience as a necessary but insufficient

condition for the development of expertise and points to the role of extended critical engagement

with practice in developing expertise (Ericsson 2006 Ericsson Krampe amp Tesch-Roemer

1993)

Traders were not universally positive about the role of intuition in market decision making

Some believed reliance on such feelings yields poor outcomes -

ldquoMany traders feel that models have been developed by academics who do not know

markets and [traders] think that gut feeling is more important My experience is that

this is 100 wrong and computers can make better decisions than tradersrdquo 37

medium experience medium pay

Overall however the data support a picture of expert traders having a meta-cognitive

engagement with emotion regulation This process entails discrimination between emotions in

terms of their relevance to the decision at hand and effective strategies for emotion regulation to

enhance performance

24

Empathy

The third identified theme was empathy monitoring own emotions as information

about what other market players might be feeling Only five traders explicitly described

using their own capacity for empathy as a decision making tool Although not frequent in

our data these examples are important illustrating that there is a path for traders beyond

simply seeking to eliminate or reduce the intensity of their emotions These traders

fostered feelings as a source of information about other market actors which they managed

and used in a self-aware analysis One trader described using his own fear as an indicator

of fear in the market Another described actively imagining the feelings of other market

actors ―trying to put myself in [the Bank of England Governorlsquos] feet to develop a feel for

how he feels and thinks 14 high experience high pay

Three traders talked about an emotional affinity with the feelings of people in

national markets (Spain 34 high experience medium pay Italy 70 medium experience

low pay and Japan 117 high experience medium pay) with whom they shared a common

culture and propensity to react emotionally in similar ways to the same market events This

group was small but these data broaden the picture of traders reasoning with emotionlsquo

and offer a potentially rich and fruitful avenue for future research

DISCUSSION AND CONCLUSIONS

To ask whether emotion disturbs or aids traderslsquo decision-making is to ask the wrong

question Traderslsquo emotions and cognition are inextricably linked Therefore a more productive

question to ask in this context is whether there are more or less effective strategies for managing

and using emotion in financial decision-making This has been the thrust of our analysis which

25

sought to move beyond previous work that simply characterizes emotional arousal as detrimental

to performance (eg Lo et al 2005 Schunk and Bersh 2006) The study contributes to our

understanding of the role of emotions in work and decision-making in several distinct ways In

contributing to our understanding of the role of emotion at work this study has particular

relevance in that it considers a work domain which has been theorized as strongly normatively

rational as opposed to a work domain (such as negotiation or customer service) where

performance is primarily dependent on effective social interaction However it is clear from this

study that even within such an analysis-intensive domain as financial trading emotion plays a

central role Traders and their managers are frequently preoccupied with the effective regulation

and use of emotions in their work Our work points to the value of a more nuanced understanding

which considers the role of emotions in decision-making the differential impact of various

emotion regulation strategies the conditions under which gut-feellsquo may support effective

decision-making and the role of empathic responses in understanding the behavior of other

market actors

Effective emotion regulation seems to be a critical success factor in trading for our

findings suggest that the strategies for emotion regulation adopted by expert higher performing

traders are qualitatively different from those of lower performing traders In particular higher

performers are more inclined to regulate emotions through attentional deployment and cognitive

change and may display a willingness to cope with negative feelings in the interests of

maintaining objectivity and pursuing longer term goals The kind of attention and appraisal-

focused emotion regulation strategies used by high-performing traders do not seem to be too

cognitively expensive and are effective in reducing negative experience of emotion (Gross

2002) By contrast less expert traders engage either in avoidant behaviors such as walking

away from the desk or invest significant cognitive effort in modulating their emotional

26

responses This extends previous findings (eg Grandey 2003) concerning the performance

benefits of antecedent versus response-focused emotion regulation in the context of emotion

labor to the very different context of financial decision-making Our findings also suggest that

willingness to endure negative feelings in pursuit of long-term goals may be more adaptive than

purely defensive strategies aimed at maintaining positive feelings (Labouvie-Vief 2003 Tamir

2005)

This study also provides evidence that more effective emotion regulation strategies can be

learned in a financial decision-making context While an individuallsquos preferred approach to

emotion regulation is likely to be influenced by personality traits neuroticism and extroversion in

particular (Gross amp John 2003) our interviews with traders and their managers also point to the

importance of traderslsquo learned strategies for emotion regulation Importantly our study also

suggests that defensive emotion regulation strategies may be problematic because they reduce

opportunities to exercise expert intuition

These findings go well beyond prior research on emotion regulation and performance

(eg Grandey 2003) which has a primary focus on performance in the context of interpersonal

interaction Our findings uniquely address the performance of professional traders for whom

performance is not primarily dependent on interpersonal interaction and which has been

theorized as strongly rational involving the selection of optimal strategies in the face of complex

cognitive demands and requiring attention to a large volume of information with uncertain

relevance

Turning to intuition traders in our study mirror the balance of opinion in the research

literature on intuition They are equivocal about whether feelings and hunches about appropriate

courses of action lead to better or worse outcomes than purely rational analysis There were

strong feelings on both sides with traders being quite evenly divided between the two camps

27

However again our study suggests the importance of a more nuanced approach than simply

asking whether reliance on intuition is good or bad and points towards the conditions in which

reliance on intuitive judgment may be more and less effective The findings suggest that one

characteristic of higher performing traders may be a greater willingness to reflect critically about

their intuitions and feelings about trading These traders often reported relying on intuition but

they tend to weigh their feelings critically alongside other evidence and to reflect about the

provenance of those feelings Lower performing traders may rely on feelings alone and show

less propensity to think critically about the source of hunches This reflection by expert traders

about the provenance of feelings may be particularly salient given Schwarz and Clorelsquos (1983

2003) finding that the impact of emotions on behavior is reduced or disappears when the

relevance of those emotions is explicitly called into question

That traderslsquo reliance on affective cues in decision-making can support effective

performance is consistent with Damasiolsquos observation that deciding advantageously depends on

the use of affective cues in both learning and deciding (Bechara et al 1997 Damasio 1994)

There is increasing evidence that humans are naturally proficient in the ability to acquire

expertise and that encapsulation of experience in expert intuition and perception via system one

provides a means of by-passing cognitive limits (Ericsson 2006) The nature of expertise could

counteract the inherent environmental uncertainties that Tiedens and Linton (2001) identified as

leading to more conscious appraisal of information While not an unequivocal result our finding

of greater critical engagement among higher performing traders with intuitions and their more

sophisticated deployment of intuition in combination with analysis suggests an important

direction for future research

The small number of accounts of traders monitoring their own emotions as a source of

information about the emotions of other market actors was intriguing These data suggest a

28

possibly productive avenue for future research We do not have evidence of performance

outcomes of predictive uses of empathy in this manner but our findings are consistent with

arguments that the evolution of the human brain has been significantly driven by the need to

predict the behavior of other humans often via subtle cues (eg Nicholson 2000)

We suggest that the identification of links between decision-making performance and

emotion regulation in this study has important implications for theory development in two key

fields First while somewhat tacit in much of the literature the implication of many claims in the

decision-making and behavioral finance literatures is that a range of key decision-making biases

are underpinned by mechanisms which involve emotion processes One relevant explicit example

is Thalerlsquos (1985 1999) account of the role of hedonic editinglsquo in mental accounting and the

disposition effect (the tendency to hold losing assets longer than winning assets) This explains

key biases in terms of the desire to maintain positive hedonic tone There is evidence too of

interpersonal variation in propensity to exhibit such biases for example investors vary in their

propensity to exhibit the disposition effect (Shapira amp Venezia 2001 Weber amp Welfens 2008)

In this study we have seen that traders seek to regulate emotions in order to avoid decision biases

and that higher performing traders typically exhibit more sophisticated emotion regulation

strategies This suggests that it would be productive to investigate the role of emotion regulation

as one key source of interpersonal variation in susceptibility to a range of decision biases

A second implication concerns the role of emotion in expert performance While much

attention has been paid to the nature of cognition in expert performance the expertise literature

hardly considers the role of emotion For example examining the index of the Cambridge

Handbook of Expertise and Expert Performance (Ericsson et al 2006) reveals very few

references to emotion and these are peripheral to the main arguments of the chapters which

contain them Our research suggests first that effective emotion regulation may be an important

29

facet of expert performance and second that greater attention should be paid to the interactions

between emotion emotion regulation and expert intuition Further research could test the

proposition that effective expert intuition is reduced by reliance on defensive emotion regulation

strategies

While our study points to the importance of intuition in traderslsquo work it may be that the

relative importance of intuition and analysis vary with task characteristics such as time span of

decision-making Certainly this seemed to be the view of several senior managers with

responsibility for allocating traders to trading roles The interplay that expert traders described

between intuition and analysis is also intriguing The importance of context to the role of affect

in decision-making has been noted in prior research (Forgas amp George 2001) Further research

could usefully explore this aspect of traderslsquo expertise

This study also contains some potentially important implications for practice First it

points to the importance of learned strategies for emotion regulation and the need for effective

support for their development Second our data directly and indirectly point to the key role of

management in this process Our findings suggest that there may be considerable benefits to

skilled managerial interventions that help to steer effective emotion regulation and support

inexperienced traders in developing emotion regulation skills Additionally managers may be

able to help traders to understand the productive role that critically engaged experience-based

intuition may play in decision-making Our evidence suggests that many high performing traders

deploy a reflective and critical approach to the use and development of intuition well-founded in

experience Managers could help to guide this process through coaching The contextual

dependence of high quality intuitions suggests they are quite domain specific and may not

transfer across contexts As several informants told us this is especially true for traders operating

under different market conditions

30

We heard repeated concerns from senior managers who worried about traders who had

not seen a bear market and would not operate well when that occurred We also heard many

stories of people transferring between trading areas and needing time to re-contextualize

expertise before their intuitions could be considered reliable Thus managers have a role in

helping traders to extend the boundaries of their expertise Given recent events in financial

markets our findings may be relevant to an understanding of how traders react under massively

changed trading conditions and how those reactions might either contribute to or result from

market volatility

This research has some important limitations First although we have argued for the

importance of an account of emotion that includes the experience of emotion as Pham (2004

368) notes the affective system is focused on the present Thus people can be poor at recalling or

predicting emotions There are limits to the human capacity to introspect on emotion processes

and to recall the experience of emotion These limits are also subject to wide individual

differences The capacity for introspection and recall will also vary between individuals For this

reason studies such as ours need to be complemented with more physiologically based research

as well as further qualitative and quantitative studies

Second as in all work contexts traders subscribe to norms of socially sanctioned

behavior and to common narratives about the nature of their work We have not treated emotional

labor as a primary component of traderslsquo work and performance The majority of work

interactions are carried out through highly abbreviated electronic exchanges which provide a poor

medium for the communication of emotion However there is a sense in which traders engage in

emotional labor since especially for novices there are social pressures to comply with display

rules which emphasize the avoidance of displays of strong emotion One common narrative

thread that ran though many traderslsquo accounts of their work was a representation of trading work

31

as principally concerned with rational analysis from which emotions are a dangerous distraction

This narrative seemed particularly strong in the accounts of less experienced traders Although as

we have seen the mask would often slip as they discussed their work Some traderslsquo accounts

were clearly colored by a desire to conform to this mode of self-presentation In consequence it is

possible that in our interviews and during data analysis we were at times unable to distinguish

effectively between defensive denial of emotion and effective regulation of emotion This would

be another avenue for future research

To conclude we know that emotions are a rich source of experience in everyday life but

at the same time in work contexts they can be a source of vulnerability a wayward influence over

judgment and a source of disturbance to process The more ―rational-economic such

environments are the more likely we are to hold such beliefs (Nicholson 2000) Our research

illustrates that this position is false or at best short-sighted In the hyper-rational world of

trading in financial markets we did find some evidence that emotions disturbed performance but

mostly among the inexperienced and un-reflective traders The best traders are able to regulate

emotions effectively and incorporate relevant emotions as information ndash signals or a kind of

radar that contain information about risks what is going on in the minds of others and the weight

and relevance to be accorded to onelsquos own past experience

32

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Bechara A Damasio A Tranel D amp Damasio A R (1997) Deciding advantageously before

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Dane E amp Pratt M G (2007) Exploring intuition and its role in managerial decision making

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Finucane M L Alhakami A Slovic P amp Johnson S M (2000) The affect heuristic in

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Forgas JP amp George JM (2001) Affective influences on judgments and behavior in

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Grandey AA (2000) Emotion Regulation in the Workplace A new way to conceptualize

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Gross J (2002) Emotion regulation affective cognitive and social consequences

Psychophysiology 39 281

Gross J J amp John O P (2003) Individual differences in two emotion regulation processes

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Gross J J amp Thompson R A (2007) Emotion regulation Conceptual foundations In J J

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Isen A M Shalker T E Clark M amp Karp L (1978) Affect accessibility of material in

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Johnson E amp Tversky A (1983) Affect generalization and the perception of risk Journal of

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Kavanaugh D amp Bower G (1985) Mood and self-efficacy Impact of job and sadness on

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580

Knorr-Cetina K amp Brugger U (2002) Traders Engagement with Markets A Postsocial

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Labouvie-Vief G (2003) Dynamic integration Affect cognition and the self in adulthood

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Lerner J S amp Keltner D (2001) Fear anger and risk Journal of Personality and Social

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Lerner J S Small D A amp Loewenstein G (2004) Heart strings and purse strings Carryover

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Lo A Repin D amp Steenbarger B (2005) Fear and greed in financial markets A clinical study

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Miller G (2003) The cognitive revolution a historical perspective Trends in Cognitive Science

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Muraven M amp Baumeister R F (2000) Self-regulation and depletion of limited resources

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Nicholson N (2000) Managing the Human Animal London ThomsonTexere

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Peterson R L (2007) Affect and financial decision-making How neuroscience can inform

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Pham M T (2004) The logic of feeling Journal of Consumer Psychology 14 360-369

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Sayer A (1997) Essentialism social constructionism and beyond The Sociological Review 45

453-487

Shapira Z amp Venezia I (2001) Patterns of behavior of professionally managed and

independent investors Journal of Banking and Finance 25 1573ndash1587

Schunk D amp Betsch C (2006) Explaining the heterogeneity in utility functions by individual

differences in decision modes Journal of Economic Psychology 27 386-401

Schwager J D (1993) Market Wizards Interviews with Top Traders New York Collins

Schwarz N amp Clore G L (1983) Mood misattribution and judgments of well-being

Informative and directive functions of affective states Journal of Personality and Social

Psychology 45 513-523

Seo M G Barrett L F amp Bartunek J M (2004) The role of affective experience in work

motivation Academy of Management Review 29 423-439

Seo M G amp Barrett L F (2007) Being emotional during decision makingmdashgood or bad An

empirical investigation The Academy of Management Journal 50 923-940

Shefrin H (2000) Beyond Greed and Fear Understanding Behavioral Finance and the

Psychology of Investing Boston MA Harvard Business School Press

Stokes A F Kemper K amp Kite K (1997) Aeronautical decision making cue recognition and

expertise under time pressure In C E Zsambok amp G Klein (Eds) Naturalistic Decision

Making pp 183-196 Mahwah NJ Erlbaum

Tamir M (2005) Dont worry be happy Neuroticism trait-consistent affect regulation

and performance Journal of Personality and Social Psychology 89 (3) 449 ndash

461

Thaler R H (1985) Mental accounting and consumer choice Marketing Science 4(3) 199-214

Thaler R H (1993) Advances In Behavioral Finance New York Russel Sage Foundation

Thaler R H (1999) Mental accounting matters Journal of Behavioral Decision Making 12(3)

183-206

Tiedens L amp Linton S (2001) Judgment under emotional certainty and uncertainty the effects

of specific emotions on information processing Journal of Personality and Social

Psychology 81(6) 973-988

Todd P M amp Gigerenzer G (2007) Environments that make us smart Ecological rationality

Current Directions in Psychological Science 16 167-171

Totterdell P Briner R B Parkinson B amp Reynolds S (1996) Fingerprinting time series

dynamic patterns in self-report and performance measures uncovered by a graphical non-

linear method British Journal of Psychology 87(1) 43-60

Weber M amp Welfens F (2008) Splitting the Disposition Effect Asymmetric Reactions

Towards bdquoSelling winners‟ and bdquoHolding Losers‟ Working Paper University of

Mannheim

Wright WF amp Bower GH (1992) Mood effects on subjective probability assessment

Organizational Behavior and Human Decision Processes 52 276ndash91

15

working for him as ―having been in the wilderness his confidence totally shattered for about

two years before slowly recovering from a string of losses Many talked about needing weeks or

even months to recover from the impact of major losses especially early in their careers Others

talked about the dangers of false confidence or euphoria which could persist for some time after a

big win

ldquoPeople get a bit arrogant when they have good times but this can be dangerous

because then they stop thinking as muchrdquo 18 medium experience medium pay

ldquoI tend to feel more cautious when losing moneyhellipIf I am having a down month I‟ll

look at trades which I would do if I was having a good month and say I don‟t like it

enough to take the risk on it I become more selective more risk averse and to do a

trade I need to see more than one reason why a trade will work and then might put it

on but not in a huge size When making money I can be more slack 29 high

experience high pay

However our data also suggest emotion regulation is critical to moderating the impact of

emotions on traderslsquo decision making Senior traders and trader managers frequently talked about

the way in which they had developed a capacity to regulate their own emotions and trade more

evenly regardless of success and setbacks

ldquoYou learn to be able to deal with emotions It doesn‟t get to me as much There

were situations when I was extremely stressed up and then you feel physically ill and

you really feel on the verge of throwing up But that was a long time ago and doesn‟t

happen so much now You have seen the ups and downs more You have experienced

them and in a way you are probably more prepared for it and you are aware that

every now and then it will happenhellip but it doesn‟t get to you all that much because

you are aware that it will happen 6 medium experience high pay

16

We examined emotion regulation and its relevance to performance further by considering

data from the three comparison groups (based on experience and pay) We noticed some

important differences in the way in which these groups discussed the interaction between

emotion trading and the use of intuition First there seemed to be notable differences in the

strategies employed for emotion regulation which we describe below in the language of the

Gross and Thompson model (2007) When asked directly about emotion traders in the low

experience group typically started by presenting themselves as fairly immune to the impact of

emotion on their trading However as the interview progressed they would often reveal rather

more vulnerability to emotions than they had claimed initially Take for example this trader who

had been trading for a little less than 4 years -

ldquoI‟m bit of a cold fish I don‟t think emotions greatly affect my decision-making If

you are making money you are achieving your objectivehellip

[But later]

hellipWhen you lose money it can be horrendous violent mood swings You don‟t know

what to do when you lose moneyrdquo 38 low experience low pay

There tended to be two responses types when these traders did talk about their emotions

Some in the low experience low pay group did not talk at all about actively managing their

emotions Others talked about removing themselves from situations when their emotions became

a problem (situation modification) or avoiding situations entirely which make them feel bad

(situation selection)

ldquoI think there is a strong emotional element to trading I think that anyone who‟s

doing it properly and has got their head screwed on is doing everything they can

consciously to overrule that and if I feel that I‟m trading emotionally I will walk off

17

the desk have a glass of water walk up and down the street and then come back and

make decisions when I‟m hopefully not emotionalrdquo 43 low experience low pay

Traders in the experienced group more commonly talked about strategies for emotion

regulation However the nature of these strategies tended to vary between the low paid and high

paid groups In the high experience low paid group traders seemed to find it hard to articulate

how they managed their emotions and the emotion regulation strategies they identified were

predominately situation avoidance situation modification and response modulation

ldquoIf you get two or three decisions wrong you find you might not take a risk for a

month until you build up your confidence There‟s definitely a lot of confidence

involvedrdquo 104 high experience low pay

ldquoI try and keep my emotions under tight controlrdquo 105 high experience low pay

There is a marked contrast in the discourse of the high performing traders who often

showed a greater willingness to reflect on their emotion-driven behavior (the two exceptions to

this were traders with whom we had only short interviews with little opportunity for extended

reflection rather than any denial of the role of emotion) Emotion regulation for these traders

tended to focus mainly on how they directed their attention (attentional deployment) and how

they framed experiences of loss and gain (cognitive change)

ldquoBig losses and big gains can swap around fairly quickly and once you understand

that then you stop concentrating on the loss and you start concentrating more on how

to make money back hellip One big trade is not going to make anyone and one big loss

doesn‟t destroy yourdquo 15 high experience high pay

ldquoExperience definitely helps having traded through the crash etc Youve seen

different scenarios and newer people its like oh my god its the end of the world

whereas there is life after death and so I think that type of experience helps It doesnt

18

necessarily help the new situation on what to do but it just helps your judgmentrdquo 55

high experience high pay

There was a notable absence of avoidant behavior in this group Several participants told

stories which implied a significant degree of persistence in the face of negative emotion

ldquoI had one very bad year from which I learned quite a lot I learned that the

overshooting can go on for a very long time it can be very painful you can hit risk

limits hellip I did not want to get out of the trades so kept the trades and then next year

they made more money than they lost I don‟t think I panicked but I was getting calls

from the CEO Reason prevailed in the end Emotionally it was not easy to cope

with There were times when the desk was down close to $100m I lost almost that

much in days I was under a lot of pressure from New York because they did not

understand my positions but in the end we managed to keep the positions and made

money the next year The hardest thing was persuading others that I had a good

traderdquo 14 high experience high pay

This willingness among some of the high performing traders to experience negative

emotion in order to achieve longer term goals is consistent with Labouvie-Vieflsquos (2003)

argument that positive self-development requires not just strategies to optimize positive affect

but also the ability to tolerate tension and negativity to achieve long term goals

However there may be another important reason why response modulation strategies are

maladaptive for traders As we have seen above while poorly regulated emotions carry over to

subsequent trading and risk biasing subsequent trading behavior emotion cues generated by

reactions to information relevant to current trading under time constraints play an important role

in guiding attention and rapidly choosing appropriate action Both poor regulation of non-

19

relevant emotions and recourse to the attempted suppression of all feeling run the risk of masking

these important cues

The Role of Managers in Emotion Regulation

Further evidence of the importance of emotions and their regulation to trader performance

came from interviews with trader managers A few managers described their role in primarily

technical terms focusing on risk management and personal supervision of problematic trades

However many of those we interviewed clearly saw regulating the emotions of traders who

worked for them as a key element in managing trader performance

ldquoI have to play the role of director of emotions in the sense that when they are down

you have to boost their morale and when they are too excited they want to do stupid

things I have to cool them downrdquo 119 senior manager

ldquoI care deeply because I have tremendous pride in the people herehellipThe stress is

generated by fear entirely and it‟s fear of what I guess everyone has their

insecurities whether it‟s being fired losing lots of money and appearing stupid in

front of their peer group Whatever it is it‟s definitely fear and if you can take the

fear out of the situation they perform betterrdquo 123 senior trader manager high

experience high pay

Many traders described such episodes of managerial intervention as crucial to their

learning and development For example-

ldquoI lost $1m in the first 10 days of the year This was at a time when if you made $1m

in a year that was huge I was devastated and my boss asked me for lunch at the

weekend - I thought that was the end of my career My boss said bdquoa lot of the guys

think you‟re OK but they are worried you are going to be afraid to trade that you‟re

20

going to be gun shy and lose your confidence We want you to know that we like you

and if you think you‟ve got to buy them buy them and if you‟ve got to sell them sell

them but whatever you do don‟t stop trading‟ So that was a huge relief Since then I

don‟t get too depressed about losing money although there are always good days

and bad daysrdquo 25 low experience medium performance

Other managers clearly gave thought to the relative strengths and weaknesses of more

intuitive versus more analytical traders in their decisions about matching traders to roles -

ldquoA gut trader should trade a liquid market - he might change his feel so he needs to

get out The analytical trader who thinks much more about what he‟s doing will

change their mind less often and trade with a different time frame A gut trader can

be bullish in the morning The analytical trader will look at something for a week

and then put on a position - less important to get in and out He doesn‟t need to be in

a liquid market - in an emerging market you need a more analytical traderrdquo 122

Manager

ldquoDerivatives are very quantitative and people think if you have a PhD you will be

very good because you have an understanding of options theory but this is not

always the case and you tend to overlook things Although you can put the

parameters into the model there are still a lot of things which are uncertain

Sometimes adding a more qualitative feel to it ndashbdquoyes that‟s what the model says but

the risk doesn‟t look right‟ hellip I tend to have a mixture of people on the desk - those

who are more quantitative and those who are more common sense or gut instinct

traders Having the blend is quite useful for bouncing ideasrdquo 124 Manager

These reflections have implications for management strategies in trading environments or

indeed any others where the main role of the operative is complex decision-making under

21

constraints of time and uncertain and incomplete information We consider these points further in

our discussion

Emotional Cues and the Use of Intuition

The second broad theme concerned the role of emotional cues in traderslsquo decision-

making Many of the traders discussed this aspect of emotion as intuition Traderslsquo own accounts

and conceptualizations of intuition fit well with Dane and Prattlsquos (200740) definition of intuition

as ―affectively charged judgments that arise through rapid non-conscious and holistic

associations For example -

ldquo[W]ithout a doubt some of the best bargains are the ones you dont do You know

theyre bad bargains You know It‟s a gut feel Youve looked at the playing field and

you just know this is a bad bargainrdquo 106 high experience moderate pay

Some of the traders see a more subtle and sophisticated role for emotions which represent

an unconscious drawing on experience -

ldquoI think many people do say theyre gut-feel traders but perhaps theyre not analyzing

what theyre actually thinking and theyre seeing a lot of customer flow and a lot of

buyers and they probably dont necessarily realize the reasons why they want to buy

But there are very good traders that say theyre trading off gut feel that I believe

actually have probably reasonable information reasonable thoughts behind it but

they wouldnt literally toss a coinrdquo 55 high experience high pay

Feelings are also seen as a kind of radar directing attention and shaping perceptions

around opportunities to enable them to be promptly seized

ldquoI think what a trader has to have is not necessarily this gut feeling but this nose for

opportunities If an opportunity comes along you have to be able to spot it and see it

22

and sometimes people you typically find in this business - an opportunity is there and

they cant see it and then its taken by someone else and its like oh yeah that was a

good idea but it is gonerdquo 58 high experience low pay

Not only do feelings act as a kind of radar directing attention but they do so in a way that

enables rapid decision making under time pressure As one trader noted -

ldquoTrading includes stuff which is beyond trading Trading is when you make decisions

involving financial risk that have two qualities you have to make them in someone

else‟s time schedule not your own and when you make a decision you have to be

confident when you have incomplete or imperfect information and therefore there

must be some kind of intuitive or qualitative elementrdquo 121 high experience high pay

Experienced traders made much more reference to intuition or gut feellsquo as they often

phrased it than less experienced traders However again there were important differences

between low and high paid traders in the high experience group Low paid traders who talked

about the use of intuition often talked of it in terms of a rather mysterious process You either had

a feeling or not For example

ldquoIt‟s almost like a sixth sense Something comes over you and you feel like - yes I

know they‟re going to be looking to buy these later on or looking to sell these later

onrdquo 116 high experience low pay

By contrast the top paid group tended to reflect critically about the origins of their

intuitions and to bring them together with more objective information -

ldquoIf I do fancy a stock - you have a feeling it feels right it has done nothing for like

two or three months and you‟ve seen sellers and they start to dwindle and it is just

stagnant and then you have a look on the charts you refer to the technical side as

well as the emotional side of the trade So you know a combination of technical and

23

emotional as well as what the analyst thinks as well so you sort of bring the

instruments you have available to you to make the decision rather than the snap

[snaps his finger] I fancy buying thatrdquo 101 high experience high pay

ldquoI may examine opportunities based on intuition that something is going to happen

but the decision is based on something I think is rationalrdquo 68 medium experience

high pay

Reported use of intuition does seem to increase with trader experience However traderslsquo

engagement with their feelings is qualitatively different between low and high performers High

performing traders seem to engage with their intuitions at a meta-cognitive level and make

judgments about the relevance of these feelings to the decision at hand This is consistent with

the growing literature on expertise which points to experience as a necessary but insufficient

condition for the development of expertise and points to the role of extended critical engagement

with practice in developing expertise (Ericsson 2006 Ericsson Krampe amp Tesch-Roemer

1993)

Traders were not universally positive about the role of intuition in market decision making

Some believed reliance on such feelings yields poor outcomes -

ldquoMany traders feel that models have been developed by academics who do not know

markets and [traders] think that gut feeling is more important My experience is that

this is 100 wrong and computers can make better decisions than tradersrdquo 37

medium experience medium pay

Overall however the data support a picture of expert traders having a meta-cognitive

engagement with emotion regulation This process entails discrimination between emotions in

terms of their relevance to the decision at hand and effective strategies for emotion regulation to

enhance performance

24

Empathy

The third identified theme was empathy monitoring own emotions as information

about what other market players might be feeling Only five traders explicitly described

using their own capacity for empathy as a decision making tool Although not frequent in

our data these examples are important illustrating that there is a path for traders beyond

simply seeking to eliminate or reduce the intensity of their emotions These traders

fostered feelings as a source of information about other market actors which they managed

and used in a self-aware analysis One trader described using his own fear as an indicator

of fear in the market Another described actively imagining the feelings of other market

actors ―trying to put myself in [the Bank of England Governorlsquos] feet to develop a feel for

how he feels and thinks 14 high experience high pay

Three traders talked about an emotional affinity with the feelings of people in

national markets (Spain 34 high experience medium pay Italy 70 medium experience

low pay and Japan 117 high experience medium pay) with whom they shared a common

culture and propensity to react emotionally in similar ways to the same market events This

group was small but these data broaden the picture of traders reasoning with emotionlsquo

and offer a potentially rich and fruitful avenue for future research

DISCUSSION AND CONCLUSIONS

To ask whether emotion disturbs or aids traderslsquo decision-making is to ask the wrong

question Traderslsquo emotions and cognition are inextricably linked Therefore a more productive

question to ask in this context is whether there are more or less effective strategies for managing

and using emotion in financial decision-making This has been the thrust of our analysis which

25

sought to move beyond previous work that simply characterizes emotional arousal as detrimental

to performance (eg Lo et al 2005 Schunk and Bersh 2006) The study contributes to our

understanding of the role of emotions in work and decision-making in several distinct ways In

contributing to our understanding of the role of emotion at work this study has particular

relevance in that it considers a work domain which has been theorized as strongly normatively

rational as opposed to a work domain (such as negotiation or customer service) where

performance is primarily dependent on effective social interaction However it is clear from this

study that even within such an analysis-intensive domain as financial trading emotion plays a

central role Traders and their managers are frequently preoccupied with the effective regulation

and use of emotions in their work Our work points to the value of a more nuanced understanding

which considers the role of emotions in decision-making the differential impact of various

emotion regulation strategies the conditions under which gut-feellsquo may support effective

decision-making and the role of empathic responses in understanding the behavior of other

market actors

Effective emotion regulation seems to be a critical success factor in trading for our

findings suggest that the strategies for emotion regulation adopted by expert higher performing

traders are qualitatively different from those of lower performing traders In particular higher

performers are more inclined to regulate emotions through attentional deployment and cognitive

change and may display a willingness to cope with negative feelings in the interests of

maintaining objectivity and pursuing longer term goals The kind of attention and appraisal-

focused emotion regulation strategies used by high-performing traders do not seem to be too

cognitively expensive and are effective in reducing negative experience of emotion (Gross

2002) By contrast less expert traders engage either in avoidant behaviors such as walking

away from the desk or invest significant cognitive effort in modulating their emotional

26

responses This extends previous findings (eg Grandey 2003) concerning the performance

benefits of antecedent versus response-focused emotion regulation in the context of emotion

labor to the very different context of financial decision-making Our findings also suggest that

willingness to endure negative feelings in pursuit of long-term goals may be more adaptive than

purely defensive strategies aimed at maintaining positive feelings (Labouvie-Vief 2003 Tamir

2005)

This study also provides evidence that more effective emotion regulation strategies can be

learned in a financial decision-making context While an individuallsquos preferred approach to

emotion regulation is likely to be influenced by personality traits neuroticism and extroversion in

particular (Gross amp John 2003) our interviews with traders and their managers also point to the

importance of traderslsquo learned strategies for emotion regulation Importantly our study also

suggests that defensive emotion regulation strategies may be problematic because they reduce

opportunities to exercise expert intuition

These findings go well beyond prior research on emotion regulation and performance

(eg Grandey 2003) which has a primary focus on performance in the context of interpersonal

interaction Our findings uniquely address the performance of professional traders for whom

performance is not primarily dependent on interpersonal interaction and which has been

theorized as strongly rational involving the selection of optimal strategies in the face of complex

cognitive demands and requiring attention to a large volume of information with uncertain

relevance

Turning to intuition traders in our study mirror the balance of opinion in the research

literature on intuition They are equivocal about whether feelings and hunches about appropriate

courses of action lead to better or worse outcomes than purely rational analysis There were

strong feelings on both sides with traders being quite evenly divided between the two camps

27

However again our study suggests the importance of a more nuanced approach than simply

asking whether reliance on intuition is good or bad and points towards the conditions in which

reliance on intuitive judgment may be more and less effective The findings suggest that one

characteristic of higher performing traders may be a greater willingness to reflect critically about

their intuitions and feelings about trading These traders often reported relying on intuition but

they tend to weigh their feelings critically alongside other evidence and to reflect about the

provenance of those feelings Lower performing traders may rely on feelings alone and show

less propensity to think critically about the source of hunches This reflection by expert traders

about the provenance of feelings may be particularly salient given Schwarz and Clorelsquos (1983

2003) finding that the impact of emotions on behavior is reduced or disappears when the

relevance of those emotions is explicitly called into question

That traderslsquo reliance on affective cues in decision-making can support effective

performance is consistent with Damasiolsquos observation that deciding advantageously depends on

the use of affective cues in both learning and deciding (Bechara et al 1997 Damasio 1994)

There is increasing evidence that humans are naturally proficient in the ability to acquire

expertise and that encapsulation of experience in expert intuition and perception via system one

provides a means of by-passing cognitive limits (Ericsson 2006) The nature of expertise could

counteract the inherent environmental uncertainties that Tiedens and Linton (2001) identified as

leading to more conscious appraisal of information While not an unequivocal result our finding

of greater critical engagement among higher performing traders with intuitions and their more

sophisticated deployment of intuition in combination with analysis suggests an important

direction for future research

The small number of accounts of traders monitoring their own emotions as a source of

information about the emotions of other market actors was intriguing These data suggest a

28

possibly productive avenue for future research We do not have evidence of performance

outcomes of predictive uses of empathy in this manner but our findings are consistent with

arguments that the evolution of the human brain has been significantly driven by the need to

predict the behavior of other humans often via subtle cues (eg Nicholson 2000)

We suggest that the identification of links between decision-making performance and

emotion regulation in this study has important implications for theory development in two key

fields First while somewhat tacit in much of the literature the implication of many claims in the

decision-making and behavioral finance literatures is that a range of key decision-making biases

are underpinned by mechanisms which involve emotion processes One relevant explicit example

is Thalerlsquos (1985 1999) account of the role of hedonic editinglsquo in mental accounting and the

disposition effect (the tendency to hold losing assets longer than winning assets) This explains

key biases in terms of the desire to maintain positive hedonic tone There is evidence too of

interpersonal variation in propensity to exhibit such biases for example investors vary in their

propensity to exhibit the disposition effect (Shapira amp Venezia 2001 Weber amp Welfens 2008)

In this study we have seen that traders seek to regulate emotions in order to avoid decision biases

and that higher performing traders typically exhibit more sophisticated emotion regulation

strategies This suggests that it would be productive to investigate the role of emotion regulation

as one key source of interpersonal variation in susceptibility to a range of decision biases

A second implication concerns the role of emotion in expert performance While much

attention has been paid to the nature of cognition in expert performance the expertise literature

hardly considers the role of emotion For example examining the index of the Cambridge

Handbook of Expertise and Expert Performance (Ericsson et al 2006) reveals very few

references to emotion and these are peripheral to the main arguments of the chapters which

contain them Our research suggests first that effective emotion regulation may be an important

29

facet of expert performance and second that greater attention should be paid to the interactions

between emotion emotion regulation and expert intuition Further research could test the

proposition that effective expert intuition is reduced by reliance on defensive emotion regulation

strategies

While our study points to the importance of intuition in traderslsquo work it may be that the

relative importance of intuition and analysis vary with task characteristics such as time span of

decision-making Certainly this seemed to be the view of several senior managers with

responsibility for allocating traders to trading roles The interplay that expert traders described

between intuition and analysis is also intriguing The importance of context to the role of affect

in decision-making has been noted in prior research (Forgas amp George 2001) Further research

could usefully explore this aspect of traderslsquo expertise

This study also contains some potentially important implications for practice First it

points to the importance of learned strategies for emotion regulation and the need for effective

support for their development Second our data directly and indirectly point to the key role of

management in this process Our findings suggest that there may be considerable benefits to

skilled managerial interventions that help to steer effective emotion regulation and support

inexperienced traders in developing emotion regulation skills Additionally managers may be

able to help traders to understand the productive role that critically engaged experience-based

intuition may play in decision-making Our evidence suggests that many high performing traders

deploy a reflective and critical approach to the use and development of intuition well-founded in

experience Managers could help to guide this process through coaching The contextual

dependence of high quality intuitions suggests they are quite domain specific and may not

transfer across contexts As several informants told us this is especially true for traders operating

under different market conditions

30

We heard repeated concerns from senior managers who worried about traders who had

not seen a bear market and would not operate well when that occurred We also heard many

stories of people transferring between trading areas and needing time to re-contextualize

expertise before their intuitions could be considered reliable Thus managers have a role in

helping traders to extend the boundaries of their expertise Given recent events in financial

markets our findings may be relevant to an understanding of how traders react under massively

changed trading conditions and how those reactions might either contribute to or result from

market volatility

This research has some important limitations First although we have argued for the

importance of an account of emotion that includes the experience of emotion as Pham (2004

368) notes the affective system is focused on the present Thus people can be poor at recalling or

predicting emotions There are limits to the human capacity to introspect on emotion processes

and to recall the experience of emotion These limits are also subject to wide individual

differences The capacity for introspection and recall will also vary between individuals For this

reason studies such as ours need to be complemented with more physiologically based research

as well as further qualitative and quantitative studies

Second as in all work contexts traders subscribe to norms of socially sanctioned

behavior and to common narratives about the nature of their work We have not treated emotional

labor as a primary component of traderslsquo work and performance The majority of work

interactions are carried out through highly abbreviated electronic exchanges which provide a poor

medium for the communication of emotion However there is a sense in which traders engage in

emotional labor since especially for novices there are social pressures to comply with display

rules which emphasize the avoidance of displays of strong emotion One common narrative

thread that ran though many traderslsquo accounts of their work was a representation of trading work

31

as principally concerned with rational analysis from which emotions are a dangerous distraction

This narrative seemed particularly strong in the accounts of less experienced traders Although as

we have seen the mask would often slip as they discussed their work Some traderslsquo accounts

were clearly colored by a desire to conform to this mode of self-presentation In consequence it is

possible that in our interviews and during data analysis we were at times unable to distinguish

effectively between defensive denial of emotion and effective regulation of emotion This would

be another avenue for future research

To conclude we know that emotions are a rich source of experience in everyday life but

at the same time in work contexts they can be a source of vulnerability a wayward influence over

judgment and a source of disturbance to process The more ―rational-economic such

environments are the more likely we are to hold such beliefs (Nicholson 2000) Our research

illustrates that this position is false or at best short-sighted In the hyper-rational world of

trading in financial markets we did find some evidence that emotions disturbed performance but

mostly among the inexperienced and un-reflective traders The best traders are able to regulate

emotions effectively and incorporate relevant emotions as information ndash signals or a kind of

radar that contain information about risks what is going on in the minds of others and the weight

and relevance to be accorded to onelsquos own past experience

32

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Baumeister R F Bratslavsky E Muraven M amp Tice D M (1998) Ego depletion Is the

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1265

Bechara A Damasio A Tranel D amp Damasio A R (1997) Deciding advantageously before

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Bower G H (1981) Mood and memory American Psychologist 36 129 ndash 148

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Braun V amp Clarke V (2006) Using thematic analysis in psychology Qualitative Research in

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Buck R (1999) The biological affects a typology Psychological Reveiw 106 301-336

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Putnam

Dane E amp Pratt M G (2007) Exploring intuition and its role in managerial decision making

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De Bondt W Palm F amp Wolff C (2004) Introduction to the special issue on behavioral

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Dreyfus H amp Dreyfus S (2005) Expertise in real world contexts Organization Studies 26

779-792

Epstein S Pacini R Denes-Raj V amp Heier H (1996) Individual differences in intuitive-

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Ericsson K A Krampe R T amp Tesch-Roemer C (1993) The role of deliberate practice in the

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Ericsson K A (2006) An introduction to the Cambridge Handbook of Expertise and Expert

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Expert Performance 1st ed 3-20 Cambridge Cambridge University Press

Fama E F (1991) Efficient Capital Markets II The Journal of Finance 46 1575-1617

Fama E F (1998) Market efficiency long-term returns and behavioral finance Journal of

Financial Economics Vol 49 283-306

Fenton-OCreevy M Nicholson N Soane E amp Willman P (2005) Traders Risks Decisions

and Management in Financial Markets Oxford Oxford University Press

Finucane M L Alhakami A Slovic P amp Johnson S M (2000) The affect heuristic in

judgments of risks and benefits Journal of Behavioral Decision Making 13(1) 1-17

Forgas JP amp George JM (2001) Affective influences on judgments and behavior in

organizations An information processing perspective Organizational Behavior and

Human Decision Processes 86(1) 3-34

Grandey AA (2000) Emotion Regulation in the Workplace A new way to conceptualize

Emotional Labor Journal of Occupational Health Psychology 5(1) 95-110

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Grandey A A (2003) When the show must go on surface acting and deep acting as

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Management Journal 46 86-96

Gray JA (1999) Cognition emotion conscious experience and the brain In T Dalgleish and

MJ Power (Eds) Handbook of Cognition and Emotion (pp83-102) Chichester England

Wiley

Gross J (2002) Emotion regulation affective cognitive and social consequences

Psychophysiology 39 281

Gross J J amp John O P (2003) Individual differences in two emotion regulation processes

Implications for affect relationships and well-being Journal of Personality and Social

Psychology 85(2) 348-362

Gross J J amp Thompson R A (2007) Emotion regulation Conceptual foundations In J J

Gross (Ed) Handbook of emotion regulation New York NY Guilford Press

Isen A M Shalker T E Clark M amp Karp L (1978) Affect accessibility of material in

memory and behavior A cognitive loop Journal of Personality and Social Psychology

36 1-12

Johnson E amp Tversky A (1983) Affect generalization and the perception of risk Journal of

Personality and Social Psychology 45(1) 20-31

Kavanaugh D amp Bower G (1985) Mood and self-efficacy Impact of job and sadness on

perceived capabilities Cognitive Therapy and Research 9 507-525

Klein G A Calderwood R amp Clinton Cirocco A (1986) Rapid decision-making on the

fireground Human Factors and Ergonomics Society 30th Annual Meeting Vol 1 576-

580

Knorr-Cetina K amp Brugger U (2002) Traders Engagement with Markets A Postsocial

Relationship Theory Culture and Society 19(5-6) 161-185

Labouvie-Vief G (2003) Dynamic integration Affect cognition and the self in adulthood

Current Directions in Psychological Science 12 201-206

Lerner J S amp Keltner D (2001) Fear anger and risk Journal of Personality and Social

Psychology 81(1) 146-159

Lerner J S Small D A amp Loewenstein G (2004) Heart strings and purse strings Carryover

effects of emotions on economic decisions Psychological Science 15(5) 337-341

Lo A Repin D amp Steenbarger B (2005) Fear and greed in financial markets A clinical study

of day traders American Economic Review 95 352-359

Lo A W amp Repin D V (2002) The Psychophysiology of Real-Time Financial Risk

Processing Journal of Cognitive Neuroscience 14 323-339

MacKenzie D (2006) An Engine Not A Camera How Financial Models Shape Markets

Cambridge Mass MIT Press

Mayer JD amp Hanson A (1995) Mood-congruent judgment over time Personality and Social

Psychology Bulletin 21 237-244

Mayer JD DiPaolo M and Salovey P (1990) Perceiving affective content in ambiguous

visual stimuli a component of emotional intelligence Journal of Personality Assessment

54 772-781

Miller G (2003) The cognitive revolution a historical perspective Trends in Cognitive Science

7 141

Muraven M amp Baumeister R F (2000) Self-regulation and depletion of limited resources

Does self-control resemble a muscle Psychological Bulletin 126 247-259

Nicholson N (2000) Managing the Human Animal London ThomsonTexere

34

Peterson R L (2007) Affect and financial decision-making How neuroscience can inform

market participants The Journal of Behavioral Finance 8(2) 70-78

Pham M T (2004) The logic of feeling Journal of Consumer Psychology 14 360-369

Phelps E A (2006) Emotion and cognition Insights from studies of the human amygdala

Annual Review of Psychology 57 27-53

Sayer A (1997) Essentialism social constructionism and beyond The Sociological Review 45

453-487

Shapira Z amp Venezia I (2001) Patterns of behavior of professionally managed and

independent investors Journal of Banking and Finance 25 1573ndash1587

Schunk D amp Betsch C (2006) Explaining the heterogeneity in utility functions by individual

differences in decision modes Journal of Economic Psychology 27 386-401

Schwager J D (1993) Market Wizards Interviews with Top Traders New York Collins

Schwarz N amp Clore G L (1983) Mood misattribution and judgments of well-being

Informative and directive functions of affective states Journal of Personality and Social

Psychology 45 513-523

Seo M G Barrett L F amp Bartunek J M (2004) The role of affective experience in work

motivation Academy of Management Review 29 423-439

Seo M G amp Barrett L F (2007) Being emotional during decision makingmdashgood or bad An

empirical investigation The Academy of Management Journal 50 923-940

Shefrin H (2000) Beyond Greed and Fear Understanding Behavioral Finance and the

Psychology of Investing Boston MA Harvard Business School Press

Stokes A F Kemper K amp Kite K (1997) Aeronautical decision making cue recognition and

expertise under time pressure In C E Zsambok amp G Klein (Eds) Naturalistic Decision

Making pp 183-196 Mahwah NJ Erlbaum

Tamir M (2005) Dont worry be happy Neuroticism trait-consistent affect regulation

and performance Journal of Personality and Social Psychology 89 (3) 449 ndash

461

Thaler R H (1985) Mental accounting and consumer choice Marketing Science 4(3) 199-214

Thaler R H (1993) Advances In Behavioral Finance New York Russel Sage Foundation

Thaler R H (1999) Mental accounting matters Journal of Behavioral Decision Making 12(3)

183-206

Tiedens L amp Linton S (2001) Judgment under emotional certainty and uncertainty the effects

of specific emotions on information processing Journal of Personality and Social

Psychology 81(6) 973-988

Todd P M amp Gigerenzer G (2007) Environments that make us smart Ecological rationality

Current Directions in Psychological Science 16 167-171

Totterdell P Briner R B Parkinson B amp Reynolds S (1996) Fingerprinting time series

dynamic patterns in self-report and performance measures uncovered by a graphical non-

linear method British Journal of Psychology 87(1) 43-60

Weber M amp Welfens F (2008) Splitting the Disposition Effect Asymmetric Reactions

Towards bdquoSelling winners‟ and bdquoHolding Losers‟ Working Paper University of

Mannheim

Wright WF amp Bower GH (1992) Mood effects on subjective probability assessment

Organizational Behavior and Human Decision Processes 52 276ndash91

16

We examined emotion regulation and its relevance to performance further by considering

data from the three comparison groups (based on experience and pay) We noticed some

important differences in the way in which these groups discussed the interaction between

emotion trading and the use of intuition First there seemed to be notable differences in the

strategies employed for emotion regulation which we describe below in the language of the

Gross and Thompson model (2007) When asked directly about emotion traders in the low

experience group typically started by presenting themselves as fairly immune to the impact of

emotion on their trading However as the interview progressed they would often reveal rather

more vulnerability to emotions than they had claimed initially Take for example this trader who

had been trading for a little less than 4 years -

ldquoI‟m bit of a cold fish I don‟t think emotions greatly affect my decision-making If

you are making money you are achieving your objectivehellip

[But later]

hellipWhen you lose money it can be horrendous violent mood swings You don‟t know

what to do when you lose moneyrdquo 38 low experience low pay

There tended to be two responses types when these traders did talk about their emotions

Some in the low experience low pay group did not talk at all about actively managing their

emotions Others talked about removing themselves from situations when their emotions became

a problem (situation modification) or avoiding situations entirely which make them feel bad

(situation selection)

ldquoI think there is a strong emotional element to trading I think that anyone who‟s

doing it properly and has got their head screwed on is doing everything they can

consciously to overrule that and if I feel that I‟m trading emotionally I will walk off

17

the desk have a glass of water walk up and down the street and then come back and

make decisions when I‟m hopefully not emotionalrdquo 43 low experience low pay

Traders in the experienced group more commonly talked about strategies for emotion

regulation However the nature of these strategies tended to vary between the low paid and high

paid groups In the high experience low paid group traders seemed to find it hard to articulate

how they managed their emotions and the emotion regulation strategies they identified were

predominately situation avoidance situation modification and response modulation

ldquoIf you get two or three decisions wrong you find you might not take a risk for a

month until you build up your confidence There‟s definitely a lot of confidence

involvedrdquo 104 high experience low pay

ldquoI try and keep my emotions under tight controlrdquo 105 high experience low pay

There is a marked contrast in the discourse of the high performing traders who often

showed a greater willingness to reflect on their emotion-driven behavior (the two exceptions to

this were traders with whom we had only short interviews with little opportunity for extended

reflection rather than any denial of the role of emotion) Emotion regulation for these traders

tended to focus mainly on how they directed their attention (attentional deployment) and how

they framed experiences of loss and gain (cognitive change)

ldquoBig losses and big gains can swap around fairly quickly and once you understand

that then you stop concentrating on the loss and you start concentrating more on how

to make money back hellip One big trade is not going to make anyone and one big loss

doesn‟t destroy yourdquo 15 high experience high pay

ldquoExperience definitely helps having traded through the crash etc Youve seen

different scenarios and newer people its like oh my god its the end of the world

whereas there is life after death and so I think that type of experience helps It doesnt

18

necessarily help the new situation on what to do but it just helps your judgmentrdquo 55

high experience high pay

There was a notable absence of avoidant behavior in this group Several participants told

stories which implied a significant degree of persistence in the face of negative emotion

ldquoI had one very bad year from which I learned quite a lot I learned that the

overshooting can go on for a very long time it can be very painful you can hit risk

limits hellip I did not want to get out of the trades so kept the trades and then next year

they made more money than they lost I don‟t think I panicked but I was getting calls

from the CEO Reason prevailed in the end Emotionally it was not easy to cope

with There were times when the desk was down close to $100m I lost almost that

much in days I was under a lot of pressure from New York because they did not

understand my positions but in the end we managed to keep the positions and made

money the next year The hardest thing was persuading others that I had a good

traderdquo 14 high experience high pay

This willingness among some of the high performing traders to experience negative

emotion in order to achieve longer term goals is consistent with Labouvie-Vieflsquos (2003)

argument that positive self-development requires not just strategies to optimize positive affect

but also the ability to tolerate tension and negativity to achieve long term goals

However there may be another important reason why response modulation strategies are

maladaptive for traders As we have seen above while poorly regulated emotions carry over to

subsequent trading and risk biasing subsequent trading behavior emotion cues generated by

reactions to information relevant to current trading under time constraints play an important role

in guiding attention and rapidly choosing appropriate action Both poor regulation of non-

19

relevant emotions and recourse to the attempted suppression of all feeling run the risk of masking

these important cues

The Role of Managers in Emotion Regulation

Further evidence of the importance of emotions and their regulation to trader performance

came from interviews with trader managers A few managers described their role in primarily

technical terms focusing on risk management and personal supervision of problematic trades

However many of those we interviewed clearly saw regulating the emotions of traders who

worked for them as a key element in managing trader performance

ldquoI have to play the role of director of emotions in the sense that when they are down

you have to boost their morale and when they are too excited they want to do stupid

things I have to cool them downrdquo 119 senior manager

ldquoI care deeply because I have tremendous pride in the people herehellipThe stress is

generated by fear entirely and it‟s fear of what I guess everyone has their

insecurities whether it‟s being fired losing lots of money and appearing stupid in

front of their peer group Whatever it is it‟s definitely fear and if you can take the

fear out of the situation they perform betterrdquo 123 senior trader manager high

experience high pay

Many traders described such episodes of managerial intervention as crucial to their

learning and development For example-

ldquoI lost $1m in the first 10 days of the year This was at a time when if you made $1m

in a year that was huge I was devastated and my boss asked me for lunch at the

weekend - I thought that was the end of my career My boss said bdquoa lot of the guys

think you‟re OK but they are worried you are going to be afraid to trade that you‟re

20

going to be gun shy and lose your confidence We want you to know that we like you

and if you think you‟ve got to buy them buy them and if you‟ve got to sell them sell

them but whatever you do don‟t stop trading‟ So that was a huge relief Since then I

don‟t get too depressed about losing money although there are always good days

and bad daysrdquo 25 low experience medium performance

Other managers clearly gave thought to the relative strengths and weaknesses of more

intuitive versus more analytical traders in their decisions about matching traders to roles -

ldquoA gut trader should trade a liquid market - he might change his feel so he needs to

get out The analytical trader who thinks much more about what he‟s doing will

change their mind less often and trade with a different time frame A gut trader can

be bullish in the morning The analytical trader will look at something for a week

and then put on a position - less important to get in and out He doesn‟t need to be in

a liquid market - in an emerging market you need a more analytical traderrdquo 122

Manager

ldquoDerivatives are very quantitative and people think if you have a PhD you will be

very good because you have an understanding of options theory but this is not

always the case and you tend to overlook things Although you can put the

parameters into the model there are still a lot of things which are uncertain

Sometimes adding a more qualitative feel to it ndashbdquoyes that‟s what the model says but

the risk doesn‟t look right‟ hellip I tend to have a mixture of people on the desk - those

who are more quantitative and those who are more common sense or gut instinct

traders Having the blend is quite useful for bouncing ideasrdquo 124 Manager

These reflections have implications for management strategies in trading environments or

indeed any others where the main role of the operative is complex decision-making under

21

constraints of time and uncertain and incomplete information We consider these points further in

our discussion

Emotional Cues and the Use of Intuition

The second broad theme concerned the role of emotional cues in traderslsquo decision-

making Many of the traders discussed this aspect of emotion as intuition Traderslsquo own accounts

and conceptualizations of intuition fit well with Dane and Prattlsquos (200740) definition of intuition

as ―affectively charged judgments that arise through rapid non-conscious and holistic

associations For example -

ldquo[W]ithout a doubt some of the best bargains are the ones you dont do You know

theyre bad bargains You know It‟s a gut feel Youve looked at the playing field and

you just know this is a bad bargainrdquo 106 high experience moderate pay

Some of the traders see a more subtle and sophisticated role for emotions which represent

an unconscious drawing on experience -

ldquoI think many people do say theyre gut-feel traders but perhaps theyre not analyzing

what theyre actually thinking and theyre seeing a lot of customer flow and a lot of

buyers and they probably dont necessarily realize the reasons why they want to buy

But there are very good traders that say theyre trading off gut feel that I believe

actually have probably reasonable information reasonable thoughts behind it but

they wouldnt literally toss a coinrdquo 55 high experience high pay

Feelings are also seen as a kind of radar directing attention and shaping perceptions

around opportunities to enable them to be promptly seized

ldquoI think what a trader has to have is not necessarily this gut feeling but this nose for

opportunities If an opportunity comes along you have to be able to spot it and see it

22

and sometimes people you typically find in this business - an opportunity is there and

they cant see it and then its taken by someone else and its like oh yeah that was a

good idea but it is gonerdquo 58 high experience low pay

Not only do feelings act as a kind of radar directing attention but they do so in a way that

enables rapid decision making under time pressure As one trader noted -

ldquoTrading includes stuff which is beyond trading Trading is when you make decisions

involving financial risk that have two qualities you have to make them in someone

else‟s time schedule not your own and when you make a decision you have to be

confident when you have incomplete or imperfect information and therefore there

must be some kind of intuitive or qualitative elementrdquo 121 high experience high pay

Experienced traders made much more reference to intuition or gut feellsquo as they often

phrased it than less experienced traders However again there were important differences

between low and high paid traders in the high experience group Low paid traders who talked

about the use of intuition often talked of it in terms of a rather mysterious process You either had

a feeling or not For example

ldquoIt‟s almost like a sixth sense Something comes over you and you feel like - yes I

know they‟re going to be looking to buy these later on or looking to sell these later

onrdquo 116 high experience low pay

By contrast the top paid group tended to reflect critically about the origins of their

intuitions and to bring them together with more objective information -

ldquoIf I do fancy a stock - you have a feeling it feels right it has done nothing for like

two or three months and you‟ve seen sellers and they start to dwindle and it is just

stagnant and then you have a look on the charts you refer to the technical side as

well as the emotional side of the trade So you know a combination of technical and

23

emotional as well as what the analyst thinks as well so you sort of bring the

instruments you have available to you to make the decision rather than the snap

[snaps his finger] I fancy buying thatrdquo 101 high experience high pay

ldquoI may examine opportunities based on intuition that something is going to happen

but the decision is based on something I think is rationalrdquo 68 medium experience

high pay

Reported use of intuition does seem to increase with trader experience However traderslsquo

engagement with their feelings is qualitatively different between low and high performers High

performing traders seem to engage with their intuitions at a meta-cognitive level and make

judgments about the relevance of these feelings to the decision at hand This is consistent with

the growing literature on expertise which points to experience as a necessary but insufficient

condition for the development of expertise and points to the role of extended critical engagement

with practice in developing expertise (Ericsson 2006 Ericsson Krampe amp Tesch-Roemer

1993)

Traders were not universally positive about the role of intuition in market decision making

Some believed reliance on such feelings yields poor outcomes -

ldquoMany traders feel that models have been developed by academics who do not know

markets and [traders] think that gut feeling is more important My experience is that

this is 100 wrong and computers can make better decisions than tradersrdquo 37

medium experience medium pay

Overall however the data support a picture of expert traders having a meta-cognitive

engagement with emotion regulation This process entails discrimination between emotions in

terms of their relevance to the decision at hand and effective strategies for emotion regulation to

enhance performance

24

Empathy

The third identified theme was empathy monitoring own emotions as information

about what other market players might be feeling Only five traders explicitly described

using their own capacity for empathy as a decision making tool Although not frequent in

our data these examples are important illustrating that there is a path for traders beyond

simply seeking to eliminate or reduce the intensity of their emotions These traders

fostered feelings as a source of information about other market actors which they managed

and used in a self-aware analysis One trader described using his own fear as an indicator

of fear in the market Another described actively imagining the feelings of other market

actors ―trying to put myself in [the Bank of England Governorlsquos] feet to develop a feel for

how he feels and thinks 14 high experience high pay

Three traders talked about an emotional affinity with the feelings of people in

national markets (Spain 34 high experience medium pay Italy 70 medium experience

low pay and Japan 117 high experience medium pay) with whom they shared a common

culture and propensity to react emotionally in similar ways to the same market events This

group was small but these data broaden the picture of traders reasoning with emotionlsquo

and offer a potentially rich and fruitful avenue for future research

DISCUSSION AND CONCLUSIONS

To ask whether emotion disturbs or aids traderslsquo decision-making is to ask the wrong

question Traderslsquo emotions and cognition are inextricably linked Therefore a more productive

question to ask in this context is whether there are more or less effective strategies for managing

and using emotion in financial decision-making This has been the thrust of our analysis which

25

sought to move beyond previous work that simply characterizes emotional arousal as detrimental

to performance (eg Lo et al 2005 Schunk and Bersh 2006) The study contributes to our

understanding of the role of emotions in work and decision-making in several distinct ways In

contributing to our understanding of the role of emotion at work this study has particular

relevance in that it considers a work domain which has been theorized as strongly normatively

rational as opposed to a work domain (such as negotiation or customer service) where

performance is primarily dependent on effective social interaction However it is clear from this

study that even within such an analysis-intensive domain as financial trading emotion plays a

central role Traders and their managers are frequently preoccupied with the effective regulation

and use of emotions in their work Our work points to the value of a more nuanced understanding

which considers the role of emotions in decision-making the differential impact of various

emotion regulation strategies the conditions under which gut-feellsquo may support effective

decision-making and the role of empathic responses in understanding the behavior of other

market actors

Effective emotion regulation seems to be a critical success factor in trading for our

findings suggest that the strategies for emotion regulation adopted by expert higher performing

traders are qualitatively different from those of lower performing traders In particular higher

performers are more inclined to regulate emotions through attentional deployment and cognitive

change and may display a willingness to cope with negative feelings in the interests of

maintaining objectivity and pursuing longer term goals The kind of attention and appraisal-

focused emotion regulation strategies used by high-performing traders do not seem to be too

cognitively expensive and are effective in reducing negative experience of emotion (Gross

2002) By contrast less expert traders engage either in avoidant behaviors such as walking

away from the desk or invest significant cognitive effort in modulating their emotional

26

responses This extends previous findings (eg Grandey 2003) concerning the performance

benefits of antecedent versus response-focused emotion regulation in the context of emotion

labor to the very different context of financial decision-making Our findings also suggest that

willingness to endure negative feelings in pursuit of long-term goals may be more adaptive than

purely defensive strategies aimed at maintaining positive feelings (Labouvie-Vief 2003 Tamir

2005)

This study also provides evidence that more effective emotion regulation strategies can be

learned in a financial decision-making context While an individuallsquos preferred approach to

emotion regulation is likely to be influenced by personality traits neuroticism and extroversion in

particular (Gross amp John 2003) our interviews with traders and their managers also point to the

importance of traderslsquo learned strategies for emotion regulation Importantly our study also

suggests that defensive emotion regulation strategies may be problematic because they reduce

opportunities to exercise expert intuition

These findings go well beyond prior research on emotion regulation and performance

(eg Grandey 2003) which has a primary focus on performance in the context of interpersonal

interaction Our findings uniquely address the performance of professional traders for whom

performance is not primarily dependent on interpersonal interaction and which has been

theorized as strongly rational involving the selection of optimal strategies in the face of complex

cognitive demands and requiring attention to a large volume of information with uncertain

relevance

Turning to intuition traders in our study mirror the balance of opinion in the research

literature on intuition They are equivocal about whether feelings and hunches about appropriate

courses of action lead to better or worse outcomes than purely rational analysis There were

strong feelings on both sides with traders being quite evenly divided between the two camps

27

However again our study suggests the importance of a more nuanced approach than simply

asking whether reliance on intuition is good or bad and points towards the conditions in which

reliance on intuitive judgment may be more and less effective The findings suggest that one

characteristic of higher performing traders may be a greater willingness to reflect critically about

their intuitions and feelings about trading These traders often reported relying on intuition but

they tend to weigh their feelings critically alongside other evidence and to reflect about the

provenance of those feelings Lower performing traders may rely on feelings alone and show

less propensity to think critically about the source of hunches This reflection by expert traders

about the provenance of feelings may be particularly salient given Schwarz and Clorelsquos (1983

2003) finding that the impact of emotions on behavior is reduced or disappears when the

relevance of those emotions is explicitly called into question

That traderslsquo reliance on affective cues in decision-making can support effective

performance is consistent with Damasiolsquos observation that deciding advantageously depends on

the use of affective cues in both learning and deciding (Bechara et al 1997 Damasio 1994)

There is increasing evidence that humans are naturally proficient in the ability to acquire

expertise and that encapsulation of experience in expert intuition and perception via system one

provides a means of by-passing cognitive limits (Ericsson 2006) The nature of expertise could

counteract the inherent environmental uncertainties that Tiedens and Linton (2001) identified as

leading to more conscious appraisal of information While not an unequivocal result our finding

of greater critical engagement among higher performing traders with intuitions and their more

sophisticated deployment of intuition in combination with analysis suggests an important

direction for future research

The small number of accounts of traders monitoring their own emotions as a source of

information about the emotions of other market actors was intriguing These data suggest a

28

possibly productive avenue for future research We do not have evidence of performance

outcomes of predictive uses of empathy in this manner but our findings are consistent with

arguments that the evolution of the human brain has been significantly driven by the need to

predict the behavior of other humans often via subtle cues (eg Nicholson 2000)

We suggest that the identification of links between decision-making performance and

emotion regulation in this study has important implications for theory development in two key

fields First while somewhat tacit in much of the literature the implication of many claims in the

decision-making and behavioral finance literatures is that a range of key decision-making biases

are underpinned by mechanisms which involve emotion processes One relevant explicit example

is Thalerlsquos (1985 1999) account of the role of hedonic editinglsquo in mental accounting and the

disposition effect (the tendency to hold losing assets longer than winning assets) This explains

key biases in terms of the desire to maintain positive hedonic tone There is evidence too of

interpersonal variation in propensity to exhibit such biases for example investors vary in their

propensity to exhibit the disposition effect (Shapira amp Venezia 2001 Weber amp Welfens 2008)

In this study we have seen that traders seek to regulate emotions in order to avoid decision biases

and that higher performing traders typically exhibit more sophisticated emotion regulation

strategies This suggests that it would be productive to investigate the role of emotion regulation

as one key source of interpersonal variation in susceptibility to a range of decision biases

A second implication concerns the role of emotion in expert performance While much

attention has been paid to the nature of cognition in expert performance the expertise literature

hardly considers the role of emotion For example examining the index of the Cambridge

Handbook of Expertise and Expert Performance (Ericsson et al 2006) reveals very few

references to emotion and these are peripheral to the main arguments of the chapters which

contain them Our research suggests first that effective emotion regulation may be an important

29

facet of expert performance and second that greater attention should be paid to the interactions

between emotion emotion regulation and expert intuition Further research could test the

proposition that effective expert intuition is reduced by reliance on defensive emotion regulation

strategies

While our study points to the importance of intuition in traderslsquo work it may be that the

relative importance of intuition and analysis vary with task characteristics such as time span of

decision-making Certainly this seemed to be the view of several senior managers with

responsibility for allocating traders to trading roles The interplay that expert traders described

between intuition and analysis is also intriguing The importance of context to the role of affect

in decision-making has been noted in prior research (Forgas amp George 2001) Further research

could usefully explore this aspect of traderslsquo expertise

This study also contains some potentially important implications for practice First it

points to the importance of learned strategies for emotion regulation and the need for effective

support for their development Second our data directly and indirectly point to the key role of

management in this process Our findings suggest that there may be considerable benefits to

skilled managerial interventions that help to steer effective emotion regulation and support

inexperienced traders in developing emotion regulation skills Additionally managers may be

able to help traders to understand the productive role that critically engaged experience-based

intuition may play in decision-making Our evidence suggests that many high performing traders

deploy a reflective and critical approach to the use and development of intuition well-founded in

experience Managers could help to guide this process through coaching The contextual

dependence of high quality intuitions suggests they are quite domain specific and may not

transfer across contexts As several informants told us this is especially true for traders operating

under different market conditions

30

We heard repeated concerns from senior managers who worried about traders who had

not seen a bear market and would not operate well when that occurred We also heard many

stories of people transferring between trading areas and needing time to re-contextualize

expertise before their intuitions could be considered reliable Thus managers have a role in

helping traders to extend the boundaries of their expertise Given recent events in financial

markets our findings may be relevant to an understanding of how traders react under massively

changed trading conditions and how those reactions might either contribute to or result from

market volatility

This research has some important limitations First although we have argued for the

importance of an account of emotion that includes the experience of emotion as Pham (2004

368) notes the affective system is focused on the present Thus people can be poor at recalling or

predicting emotions There are limits to the human capacity to introspect on emotion processes

and to recall the experience of emotion These limits are also subject to wide individual

differences The capacity for introspection and recall will also vary between individuals For this

reason studies such as ours need to be complemented with more physiologically based research

as well as further qualitative and quantitative studies

Second as in all work contexts traders subscribe to norms of socially sanctioned

behavior and to common narratives about the nature of their work We have not treated emotional

labor as a primary component of traderslsquo work and performance The majority of work

interactions are carried out through highly abbreviated electronic exchanges which provide a poor

medium for the communication of emotion However there is a sense in which traders engage in

emotional labor since especially for novices there are social pressures to comply with display

rules which emphasize the avoidance of displays of strong emotion One common narrative

thread that ran though many traderslsquo accounts of their work was a representation of trading work

31

as principally concerned with rational analysis from which emotions are a dangerous distraction

This narrative seemed particularly strong in the accounts of less experienced traders Although as

we have seen the mask would often slip as they discussed their work Some traderslsquo accounts

were clearly colored by a desire to conform to this mode of self-presentation In consequence it is

possible that in our interviews and during data analysis we were at times unable to distinguish

effectively between defensive denial of emotion and effective regulation of emotion This would

be another avenue for future research

To conclude we know that emotions are a rich source of experience in everyday life but

at the same time in work contexts they can be a source of vulnerability a wayward influence over

judgment and a source of disturbance to process The more ―rational-economic such

environments are the more likely we are to hold such beliefs (Nicholson 2000) Our research

illustrates that this position is false or at best short-sighted In the hyper-rational world of

trading in financial markets we did find some evidence that emotions disturbed performance but

mostly among the inexperienced and un-reflective traders The best traders are able to regulate

emotions effectively and incorporate relevant emotions as information ndash signals or a kind of

radar that contain information about risks what is going on in the minds of others and the weight

and relevance to be accorded to onelsquos own past experience

32

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trait construct and stereotype activation on action Journal of Personality and Social

Psychology 71 230-244

Baumeister R F Bratslavsky E Muraven M amp Tice D M (1998) Ego depletion Is the

active self a limited resource Journal of Personality and Social Psychology 74 1252-

1265

Bechara A Damasio A Tranel D amp Damasio A R (1997) Deciding advantageously before

knowing the advantageous strategy Science 275 1293-1295

Bower G H (1981) Mood and memory American Psychologist 36 129 ndash 148

Bower G H (1991) Mood congruity of social judgments In J P Forgas (Ed) Emotion and

social judgments (pp 31ndash53) Oxford Pergamon Press

Braun V amp Clarke V (2006) Using thematic analysis in psychology Qualitative Research in

Psychology 3(2) 77-101

Buck R (1999) The biological affects a typology Psychological Reveiw 106 301-336

Damasio A R (1994) Descartes‟ error Emotion reason and the human brain New York

Putnam

Dane E amp Pratt M G (2007) Exploring intuition and its role in managerial decision making

The Academy of Management Review 32 33-54

De Bondt W Palm F amp Wolff C (2004) Introduction to the special issue on behavioral

finance Journal of Empirical Finance 11 423-427

Dreyfus H amp Dreyfus S (2005) Expertise in real world contexts Organization Studies 26

779-792

Epstein S Pacini R Denes-Raj V amp Heier H (1996) Individual differences in intuitive-

experiential and analytical-rational thinking styles Journal of Personality and Social

Psychology 71 390-405

Ericsson K A Krampe R T amp Tesch-Roemer C (1993) The role of deliberate practice in the

acquisition of expert performance Psychological Review 100 363-406

Ericsson K A (2006) An introduction to the Cambridge Handbook of Expertise and Expert

Performance its development organization and content In K A Ericsson amp N Charness

amp P J Feltovich amp R R Hoffman (Eds) The Cambridge Handbook of Expertise and

Expert Performance 1st ed 3-20 Cambridge Cambridge University Press

Fama E F (1991) Efficient Capital Markets II The Journal of Finance 46 1575-1617

Fama E F (1998) Market efficiency long-term returns and behavioral finance Journal of

Financial Economics Vol 49 283-306

Fenton-OCreevy M Nicholson N Soane E amp Willman P (2005) Traders Risks Decisions

and Management in Financial Markets Oxford Oxford University Press

Finucane M L Alhakami A Slovic P amp Johnson S M (2000) The affect heuristic in

judgments of risks and benefits Journal of Behavioral Decision Making 13(1) 1-17

Forgas JP amp George JM (2001) Affective influences on judgments and behavior in

organizations An information processing perspective Organizational Behavior and

Human Decision Processes 86(1) 3-34

Grandey AA (2000) Emotion Regulation in the Workplace A new way to conceptualize

Emotional Labor Journal of Occupational Health Psychology 5(1) 95-110

33

Grandey A A (2003) When the show must go on surface acting and deep acting as

determinants of emotional exhaustion and peer-rated service delivery Academy of

Management Journal 46 86-96

Gray JA (1999) Cognition emotion conscious experience and the brain In T Dalgleish and

MJ Power (Eds) Handbook of Cognition and Emotion (pp83-102) Chichester England

Wiley

Gross J (2002) Emotion regulation affective cognitive and social consequences

Psychophysiology 39 281

Gross J J amp John O P (2003) Individual differences in two emotion regulation processes

Implications for affect relationships and well-being Journal of Personality and Social

Psychology 85(2) 348-362

Gross J J amp Thompson R A (2007) Emotion regulation Conceptual foundations In J J

Gross (Ed) Handbook of emotion regulation New York NY Guilford Press

Isen A M Shalker T E Clark M amp Karp L (1978) Affect accessibility of material in

memory and behavior A cognitive loop Journal of Personality and Social Psychology

36 1-12

Johnson E amp Tversky A (1983) Affect generalization and the perception of risk Journal of

Personality and Social Psychology 45(1) 20-31

Kavanaugh D amp Bower G (1985) Mood and self-efficacy Impact of job and sadness on

perceived capabilities Cognitive Therapy and Research 9 507-525

Klein G A Calderwood R amp Clinton Cirocco A (1986) Rapid decision-making on the

fireground Human Factors and Ergonomics Society 30th Annual Meeting Vol 1 576-

580

Knorr-Cetina K amp Brugger U (2002) Traders Engagement with Markets A Postsocial

Relationship Theory Culture and Society 19(5-6) 161-185

Labouvie-Vief G (2003) Dynamic integration Affect cognition and the self in adulthood

Current Directions in Psychological Science 12 201-206

Lerner J S amp Keltner D (2001) Fear anger and risk Journal of Personality and Social

Psychology 81(1) 146-159

Lerner J S Small D A amp Loewenstein G (2004) Heart strings and purse strings Carryover

effects of emotions on economic decisions Psychological Science 15(5) 337-341

Lo A Repin D amp Steenbarger B (2005) Fear and greed in financial markets A clinical study

of day traders American Economic Review 95 352-359

Lo A W amp Repin D V (2002) The Psychophysiology of Real-Time Financial Risk

Processing Journal of Cognitive Neuroscience 14 323-339

MacKenzie D (2006) An Engine Not A Camera How Financial Models Shape Markets

Cambridge Mass MIT Press

Mayer JD amp Hanson A (1995) Mood-congruent judgment over time Personality and Social

Psychology Bulletin 21 237-244

Mayer JD DiPaolo M and Salovey P (1990) Perceiving affective content in ambiguous

visual stimuli a component of emotional intelligence Journal of Personality Assessment

54 772-781

Miller G (2003) The cognitive revolution a historical perspective Trends in Cognitive Science

7 141

Muraven M amp Baumeister R F (2000) Self-regulation and depletion of limited resources

Does self-control resemble a muscle Psychological Bulletin 126 247-259

Nicholson N (2000) Managing the Human Animal London ThomsonTexere

34

Peterson R L (2007) Affect and financial decision-making How neuroscience can inform

market participants The Journal of Behavioral Finance 8(2) 70-78

Pham M T (2004) The logic of feeling Journal of Consumer Psychology 14 360-369

Phelps E A (2006) Emotion and cognition Insights from studies of the human amygdala

Annual Review of Psychology 57 27-53

Sayer A (1997) Essentialism social constructionism and beyond The Sociological Review 45

453-487

Shapira Z amp Venezia I (2001) Patterns of behavior of professionally managed and

independent investors Journal of Banking and Finance 25 1573ndash1587

Schunk D amp Betsch C (2006) Explaining the heterogeneity in utility functions by individual

differences in decision modes Journal of Economic Psychology 27 386-401

Schwager J D (1993) Market Wizards Interviews with Top Traders New York Collins

Schwarz N amp Clore G L (1983) Mood misattribution and judgments of well-being

Informative and directive functions of affective states Journal of Personality and Social

Psychology 45 513-523

Seo M G Barrett L F amp Bartunek J M (2004) The role of affective experience in work

motivation Academy of Management Review 29 423-439

Seo M G amp Barrett L F (2007) Being emotional during decision makingmdashgood or bad An

empirical investigation The Academy of Management Journal 50 923-940

Shefrin H (2000) Beyond Greed and Fear Understanding Behavioral Finance and the

Psychology of Investing Boston MA Harvard Business School Press

Stokes A F Kemper K amp Kite K (1997) Aeronautical decision making cue recognition and

expertise under time pressure In C E Zsambok amp G Klein (Eds) Naturalistic Decision

Making pp 183-196 Mahwah NJ Erlbaum

Tamir M (2005) Dont worry be happy Neuroticism trait-consistent affect regulation

and performance Journal of Personality and Social Psychology 89 (3) 449 ndash

461

Thaler R H (1985) Mental accounting and consumer choice Marketing Science 4(3) 199-214

Thaler R H (1993) Advances In Behavioral Finance New York Russel Sage Foundation

Thaler R H (1999) Mental accounting matters Journal of Behavioral Decision Making 12(3)

183-206

Tiedens L amp Linton S (2001) Judgment under emotional certainty and uncertainty the effects

of specific emotions on information processing Journal of Personality and Social

Psychology 81(6) 973-988

Todd P M amp Gigerenzer G (2007) Environments that make us smart Ecological rationality

Current Directions in Psychological Science 16 167-171

Totterdell P Briner R B Parkinson B amp Reynolds S (1996) Fingerprinting time series

dynamic patterns in self-report and performance measures uncovered by a graphical non-

linear method British Journal of Psychology 87(1) 43-60

Weber M amp Welfens F (2008) Splitting the Disposition Effect Asymmetric Reactions

Towards bdquoSelling winners‟ and bdquoHolding Losers‟ Working Paper University of

Mannheim

Wright WF amp Bower GH (1992) Mood effects on subjective probability assessment

Organizational Behavior and Human Decision Processes 52 276ndash91

17

the desk have a glass of water walk up and down the street and then come back and

make decisions when I‟m hopefully not emotionalrdquo 43 low experience low pay

Traders in the experienced group more commonly talked about strategies for emotion

regulation However the nature of these strategies tended to vary between the low paid and high

paid groups In the high experience low paid group traders seemed to find it hard to articulate

how they managed their emotions and the emotion regulation strategies they identified were

predominately situation avoidance situation modification and response modulation

ldquoIf you get two or three decisions wrong you find you might not take a risk for a

month until you build up your confidence There‟s definitely a lot of confidence

involvedrdquo 104 high experience low pay

ldquoI try and keep my emotions under tight controlrdquo 105 high experience low pay

There is a marked contrast in the discourse of the high performing traders who often

showed a greater willingness to reflect on their emotion-driven behavior (the two exceptions to

this were traders with whom we had only short interviews with little opportunity for extended

reflection rather than any denial of the role of emotion) Emotion regulation for these traders

tended to focus mainly on how they directed their attention (attentional deployment) and how

they framed experiences of loss and gain (cognitive change)

ldquoBig losses and big gains can swap around fairly quickly and once you understand

that then you stop concentrating on the loss and you start concentrating more on how

to make money back hellip One big trade is not going to make anyone and one big loss

doesn‟t destroy yourdquo 15 high experience high pay

ldquoExperience definitely helps having traded through the crash etc Youve seen

different scenarios and newer people its like oh my god its the end of the world

whereas there is life after death and so I think that type of experience helps It doesnt

18

necessarily help the new situation on what to do but it just helps your judgmentrdquo 55

high experience high pay

There was a notable absence of avoidant behavior in this group Several participants told

stories which implied a significant degree of persistence in the face of negative emotion

ldquoI had one very bad year from which I learned quite a lot I learned that the

overshooting can go on for a very long time it can be very painful you can hit risk

limits hellip I did not want to get out of the trades so kept the trades and then next year

they made more money than they lost I don‟t think I panicked but I was getting calls

from the CEO Reason prevailed in the end Emotionally it was not easy to cope

with There were times when the desk was down close to $100m I lost almost that

much in days I was under a lot of pressure from New York because they did not

understand my positions but in the end we managed to keep the positions and made

money the next year The hardest thing was persuading others that I had a good

traderdquo 14 high experience high pay

This willingness among some of the high performing traders to experience negative

emotion in order to achieve longer term goals is consistent with Labouvie-Vieflsquos (2003)

argument that positive self-development requires not just strategies to optimize positive affect

but also the ability to tolerate tension and negativity to achieve long term goals

However there may be another important reason why response modulation strategies are

maladaptive for traders As we have seen above while poorly regulated emotions carry over to

subsequent trading and risk biasing subsequent trading behavior emotion cues generated by

reactions to information relevant to current trading under time constraints play an important role

in guiding attention and rapidly choosing appropriate action Both poor regulation of non-

19

relevant emotions and recourse to the attempted suppression of all feeling run the risk of masking

these important cues

The Role of Managers in Emotion Regulation

Further evidence of the importance of emotions and their regulation to trader performance

came from interviews with trader managers A few managers described their role in primarily

technical terms focusing on risk management and personal supervision of problematic trades

However many of those we interviewed clearly saw regulating the emotions of traders who

worked for them as a key element in managing trader performance

ldquoI have to play the role of director of emotions in the sense that when they are down

you have to boost their morale and when they are too excited they want to do stupid

things I have to cool them downrdquo 119 senior manager

ldquoI care deeply because I have tremendous pride in the people herehellipThe stress is

generated by fear entirely and it‟s fear of what I guess everyone has their

insecurities whether it‟s being fired losing lots of money and appearing stupid in

front of their peer group Whatever it is it‟s definitely fear and if you can take the

fear out of the situation they perform betterrdquo 123 senior trader manager high

experience high pay

Many traders described such episodes of managerial intervention as crucial to their

learning and development For example-

ldquoI lost $1m in the first 10 days of the year This was at a time when if you made $1m

in a year that was huge I was devastated and my boss asked me for lunch at the

weekend - I thought that was the end of my career My boss said bdquoa lot of the guys

think you‟re OK but they are worried you are going to be afraid to trade that you‟re

20

going to be gun shy and lose your confidence We want you to know that we like you

and if you think you‟ve got to buy them buy them and if you‟ve got to sell them sell

them but whatever you do don‟t stop trading‟ So that was a huge relief Since then I

don‟t get too depressed about losing money although there are always good days

and bad daysrdquo 25 low experience medium performance

Other managers clearly gave thought to the relative strengths and weaknesses of more

intuitive versus more analytical traders in their decisions about matching traders to roles -

ldquoA gut trader should trade a liquid market - he might change his feel so he needs to

get out The analytical trader who thinks much more about what he‟s doing will

change their mind less often and trade with a different time frame A gut trader can

be bullish in the morning The analytical trader will look at something for a week

and then put on a position - less important to get in and out He doesn‟t need to be in

a liquid market - in an emerging market you need a more analytical traderrdquo 122

Manager

ldquoDerivatives are very quantitative and people think if you have a PhD you will be

very good because you have an understanding of options theory but this is not

always the case and you tend to overlook things Although you can put the

parameters into the model there are still a lot of things which are uncertain

Sometimes adding a more qualitative feel to it ndashbdquoyes that‟s what the model says but

the risk doesn‟t look right‟ hellip I tend to have a mixture of people on the desk - those

who are more quantitative and those who are more common sense or gut instinct

traders Having the blend is quite useful for bouncing ideasrdquo 124 Manager

These reflections have implications for management strategies in trading environments or

indeed any others where the main role of the operative is complex decision-making under

21

constraints of time and uncertain and incomplete information We consider these points further in

our discussion

Emotional Cues and the Use of Intuition

The second broad theme concerned the role of emotional cues in traderslsquo decision-

making Many of the traders discussed this aspect of emotion as intuition Traderslsquo own accounts

and conceptualizations of intuition fit well with Dane and Prattlsquos (200740) definition of intuition

as ―affectively charged judgments that arise through rapid non-conscious and holistic

associations For example -

ldquo[W]ithout a doubt some of the best bargains are the ones you dont do You know

theyre bad bargains You know It‟s a gut feel Youve looked at the playing field and

you just know this is a bad bargainrdquo 106 high experience moderate pay

Some of the traders see a more subtle and sophisticated role for emotions which represent

an unconscious drawing on experience -

ldquoI think many people do say theyre gut-feel traders but perhaps theyre not analyzing

what theyre actually thinking and theyre seeing a lot of customer flow and a lot of

buyers and they probably dont necessarily realize the reasons why they want to buy

But there are very good traders that say theyre trading off gut feel that I believe

actually have probably reasonable information reasonable thoughts behind it but

they wouldnt literally toss a coinrdquo 55 high experience high pay

Feelings are also seen as a kind of radar directing attention and shaping perceptions

around opportunities to enable them to be promptly seized

ldquoI think what a trader has to have is not necessarily this gut feeling but this nose for

opportunities If an opportunity comes along you have to be able to spot it and see it

22

and sometimes people you typically find in this business - an opportunity is there and

they cant see it and then its taken by someone else and its like oh yeah that was a

good idea but it is gonerdquo 58 high experience low pay

Not only do feelings act as a kind of radar directing attention but they do so in a way that

enables rapid decision making under time pressure As one trader noted -

ldquoTrading includes stuff which is beyond trading Trading is when you make decisions

involving financial risk that have two qualities you have to make them in someone

else‟s time schedule not your own and when you make a decision you have to be

confident when you have incomplete or imperfect information and therefore there

must be some kind of intuitive or qualitative elementrdquo 121 high experience high pay

Experienced traders made much more reference to intuition or gut feellsquo as they often

phrased it than less experienced traders However again there were important differences

between low and high paid traders in the high experience group Low paid traders who talked

about the use of intuition often talked of it in terms of a rather mysterious process You either had

a feeling or not For example

ldquoIt‟s almost like a sixth sense Something comes over you and you feel like - yes I

know they‟re going to be looking to buy these later on or looking to sell these later

onrdquo 116 high experience low pay

By contrast the top paid group tended to reflect critically about the origins of their

intuitions and to bring them together with more objective information -

ldquoIf I do fancy a stock - you have a feeling it feels right it has done nothing for like

two or three months and you‟ve seen sellers and they start to dwindle and it is just

stagnant and then you have a look on the charts you refer to the technical side as

well as the emotional side of the trade So you know a combination of technical and

23

emotional as well as what the analyst thinks as well so you sort of bring the

instruments you have available to you to make the decision rather than the snap

[snaps his finger] I fancy buying thatrdquo 101 high experience high pay

ldquoI may examine opportunities based on intuition that something is going to happen

but the decision is based on something I think is rationalrdquo 68 medium experience

high pay

Reported use of intuition does seem to increase with trader experience However traderslsquo

engagement with their feelings is qualitatively different between low and high performers High

performing traders seem to engage with their intuitions at a meta-cognitive level and make

judgments about the relevance of these feelings to the decision at hand This is consistent with

the growing literature on expertise which points to experience as a necessary but insufficient

condition for the development of expertise and points to the role of extended critical engagement

with practice in developing expertise (Ericsson 2006 Ericsson Krampe amp Tesch-Roemer

1993)

Traders were not universally positive about the role of intuition in market decision making

Some believed reliance on such feelings yields poor outcomes -

ldquoMany traders feel that models have been developed by academics who do not know

markets and [traders] think that gut feeling is more important My experience is that

this is 100 wrong and computers can make better decisions than tradersrdquo 37

medium experience medium pay

Overall however the data support a picture of expert traders having a meta-cognitive

engagement with emotion regulation This process entails discrimination between emotions in

terms of their relevance to the decision at hand and effective strategies for emotion regulation to

enhance performance

24

Empathy

The third identified theme was empathy monitoring own emotions as information

about what other market players might be feeling Only five traders explicitly described

using their own capacity for empathy as a decision making tool Although not frequent in

our data these examples are important illustrating that there is a path for traders beyond

simply seeking to eliminate or reduce the intensity of their emotions These traders

fostered feelings as a source of information about other market actors which they managed

and used in a self-aware analysis One trader described using his own fear as an indicator

of fear in the market Another described actively imagining the feelings of other market

actors ―trying to put myself in [the Bank of England Governorlsquos] feet to develop a feel for

how he feels and thinks 14 high experience high pay

Three traders talked about an emotional affinity with the feelings of people in

national markets (Spain 34 high experience medium pay Italy 70 medium experience

low pay and Japan 117 high experience medium pay) with whom they shared a common

culture and propensity to react emotionally in similar ways to the same market events This

group was small but these data broaden the picture of traders reasoning with emotionlsquo

and offer a potentially rich and fruitful avenue for future research

DISCUSSION AND CONCLUSIONS

To ask whether emotion disturbs or aids traderslsquo decision-making is to ask the wrong

question Traderslsquo emotions and cognition are inextricably linked Therefore a more productive

question to ask in this context is whether there are more or less effective strategies for managing

and using emotion in financial decision-making This has been the thrust of our analysis which

25

sought to move beyond previous work that simply characterizes emotional arousal as detrimental

to performance (eg Lo et al 2005 Schunk and Bersh 2006) The study contributes to our

understanding of the role of emotions in work and decision-making in several distinct ways In

contributing to our understanding of the role of emotion at work this study has particular

relevance in that it considers a work domain which has been theorized as strongly normatively

rational as opposed to a work domain (such as negotiation or customer service) where

performance is primarily dependent on effective social interaction However it is clear from this

study that even within such an analysis-intensive domain as financial trading emotion plays a

central role Traders and their managers are frequently preoccupied with the effective regulation

and use of emotions in their work Our work points to the value of a more nuanced understanding

which considers the role of emotions in decision-making the differential impact of various

emotion regulation strategies the conditions under which gut-feellsquo may support effective

decision-making and the role of empathic responses in understanding the behavior of other

market actors

Effective emotion regulation seems to be a critical success factor in trading for our

findings suggest that the strategies for emotion regulation adopted by expert higher performing

traders are qualitatively different from those of lower performing traders In particular higher

performers are more inclined to regulate emotions through attentional deployment and cognitive

change and may display a willingness to cope with negative feelings in the interests of

maintaining objectivity and pursuing longer term goals The kind of attention and appraisal-

focused emotion regulation strategies used by high-performing traders do not seem to be too

cognitively expensive and are effective in reducing negative experience of emotion (Gross

2002) By contrast less expert traders engage either in avoidant behaviors such as walking

away from the desk or invest significant cognitive effort in modulating their emotional

26

responses This extends previous findings (eg Grandey 2003) concerning the performance

benefits of antecedent versus response-focused emotion regulation in the context of emotion

labor to the very different context of financial decision-making Our findings also suggest that

willingness to endure negative feelings in pursuit of long-term goals may be more adaptive than

purely defensive strategies aimed at maintaining positive feelings (Labouvie-Vief 2003 Tamir

2005)

This study also provides evidence that more effective emotion regulation strategies can be

learned in a financial decision-making context While an individuallsquos preferred approach to

emotion regulation is likely to be influenced by personality traits neuroticism and extroversion in

particular (Gross amp John 2003) our interviews with traders and their managers also point to the

importance of traderslsquo learned strategies for emotion regulation Importantly our study also

suggests that defensive emotion regulation strategies may be problematic because they reduce

opportunities to exercise expert intuition

These findings go well beyond prior research on emotion regulation and performance

(eg Grandey 2003) which has a primary focus on performance in the context of interpersonal

interaction Our findings uniquely address the performance of professional traders for whom

performance is not primarily dependent on interpersonal interaction and which has been

theorized as strongly rational involving the selection of optimal strategies in the face of complex

cognitive demands and requiring attention to a large volume of information with uncertain

relevance

Turning to intuition traders in our study mirror the balance of opinion in the research

literature on intuition They are equivocal about whether feelings and hunches about appropriate

courses of action lead to better or worse outcomes than purely rational analysis There were

strong feelings on both sides with traders being quite evenly divided between the two camps

27

However again our study suggests the importance of a more nuanced approach than simply

asking whether reliance on intuition is good or bad and points towards the conditions in which

reliance on intuitive judgment may be more and less effective The findings suggest that one

characteristic of higher performing traders may be a greater willingness to reflect critically about

their intuitions and feelings about trading These traders often reported relying on intuition but

they tend to weigh their feelings critically alongside other evidence and to reflect about the

provenance of those feelings Lower performing traders may rely on feelings alone and show

less propensity to think critically about the source of hunches This reflection by expert traders

about the provenance of feelings may be particularly salient given Schwarz and Clorelsquos (1983

2003) finding that the impact of emotions on behavior is reduced or disappears when the

relevance of those emotions is explicitly called into question

That traderslsquo reliance on affective cues in decision-making can support effective

performance is consistent with Damasiolsquos observation that deciding advantageously depends on

the use of affective cues in both learning and deciding (Bechara et al 1997 Damasio 1994)

There is increasing evidence that humans are naturally proficient in the ability to acquire

expertise and that encapsulation of experience in expert intuition and perception via system one

provides a means of by-passing cognitive limits (Ericsson 2006) The nature of expertise could

counteract the inherent environmental uncertainties that Tiedens and Linton (2001) identified as

leading to more conscious appraisal of information While not an unequivocal result our finding

of greater critical engagement among higher performing traders with intuitions and their more

sophisticated deployment of intuition in combination with analysis suggests an important

direction for future research

The small number of accounts of traders monitoring their own emotions as a source of

information about the emotions of other market actors was intriguing These data suggest a

28

possibly productive avenue for future research We do not have evidence of performance

outcomes of predictive uses of empathy in this manner but our findings are consistent with

arguments that the evolution of the human brain has been significantly driven by the need to

predict the behavior of other humans often via subtle cues (eg Nicholson 2000)

We suggest that the identification of links between decision-making performance and

emotion regulation in this study has important implications for theory development in two key

fields First while somewhat tacit in much of the literature the implication of many claims in the

decision-making and behavioral finance literatures is that a range of key decision-making biases

are underpinned by mechanisms which involve emotion processes One relevant explicit example

is Thalerlsquos (1985 1999) account of the role of hedonic editinglsquo in mental accounting and the

disposition effect (the tendency to hold losing assets longer than winning assets) This explains

key biases in terms of the desire to maintain positive hedonic tone There is evidence too of

interpersonal variation in propensity to exhibit such biases for example investors vary in their

propensity to exhibit the disposition effect (Shapira amp Venezia 2001 Weber amp Welfens 2008)

In this study we have seen that traders seek to regulate emotions in order to avoid decision biases

and that higher performing traders typically exhibit more sophisticated emotion regulation

strategies This suggests that it would be productive to investigate the role of emotion regulation

as one key source of interpersonal variation in susceptibility to a range of decision biases

A second implication concerns the role of emotion in expert performance While much

attention has been paid to the nature of cognition in expert performance the expertise literature

hardly considers the role of emotion For example examining the index of the Cambridge

Handbook of Expertise and Expert Performance (Ericsson et al 2006) reveals very few

references to emotion and these are peripheral to the main arguments of the chapters which

contain them Our research suggests first that effective emotion regulation may be an important

29

facet of expert performance and second that greater attention should be paid to the interactions

between emotion emotion regulation and expert intuition Further research could test the

proposition that effective expert intuition is reduced by reliance on defensive emotion regulation

strategies

While our study points to the importance of intuition in traderslsquo work it may be that the

relative importance of intuition and analysis vary with task characteristics such as time span of

decision-making Certainly this seemed to be the view of several senior managers with

responsibility for allocating traders to trading roles The interplay that expert traders described

between intuition and analysis is also intriguing The importance of context to the role of affect

in decision-making has been noted in prior research (Forgas amp George 2001) Further research

could usefully explore this aspect of traderslsquo expertise

This study also contains some potentially important implications for practice First it

points to the importance of learned strategies for emotion regulation and the need for effective

support for their development Second our data directly and indirectly point to the key role of

management in this process Our findings suggest that there may be considerable benefits to

skilled managerial interventions that help to steer effective emotion regulation and support

inexperienced traders in developing emotion regulation skills Additionally managers may be

able to help traders to understand the productive role that critically engaged experience-based

intuition may play in decision-making Our evidence suggests that many high performing traders

deploy a reflective and critical approach to the use and development of intuition well-founded in

experience Managers could help to guide this process through coaching The contextual

dependence of high quality intuitions suggests they are quite domain specific and may not

transfer across contexts As several informants told us this is especially true for traders operating

under different market conditions

30

We heard repeated concerns from senior managers who worried about traders who had

not seen a bear market and would not operate well when that occurred We also heard many

stories of people transferring between trading areas and needing time to re-contextualize

expertise before their intuitions could be considered reliable Thus managers have a role in

helping traders to extend the boundaries of their expertise Given recent events in financial

markets our findings may be relevant to an understanding of how traders react under massively

changed trading conditions and how those reactions might either contribute to or result from

market volatility

This research has some important limitations First although we have argued for the

importance of an account of emotion that includes the experience of emotion as Pham (2004

368) notes the affective system is focused on the present Thus people can be poor at recalling or

predicting emotions There are limits to the human capacity to introspect on emotion processes

and to recall the experience of emotion These limits are also subject to wide individual

differences The capacity for introspection and recall will also vary between individuals For this

reason studies such as ours need to be complemented with more physiologically based research

as well as further qualitative and quantitative studies

Second as in all work contexts traders subscribe to norms of socially sanctioned

behavior and to common narratives about the nature of their work We have not treated emotional

labor as a primary component of traderslsquo work and performance The majority of work

interactions are carried out through highly abbreviated electronic exchanges which provide a poor

medium for the communication of emotion However there is a sense in which traders engage in

emotional labor since especially for novices there are social pressures to comply with display

rules which emphasize the avoidance of displays of strong emotion One common narrative

thread that ran though many traderslsquo accounts of their work was a representation of trading work

31

as principally concerned with rational analysis from which emotions are a dangerous distraction

This narrative seemed particularly strong in the accounts of less experienced traders Although as

we have seen the mask would often slip as they discussed their work Some traderslsquo accounts

were clearly colored by a desire to conform to this mode of self-presentation In consequence it is

possible that in our interviews and during data analysis we were at times unable to distinguish

effectively between defensive denial of emotion and effective regulation of emotion This would

be another avenue for future research

To conclude we know that emotions are a rich source of experience in everyday life but

at the same time in work contexts they can be a source of vulnerability a wayward influence over

judgment and a source of disturbance to process The more ―rational-economic such

environments are the more likely we are to hold such beliefs (Nicholson 2000) Our research

illustrates that this position is false or at best short-sighted In the hyper-rational world of

trading in financial markets we did find some evidence that emotions disturbed performance but

mostly among the inexperienced and un-reflective traders The best traders are able to regulate

emotions effectively and incorporate relevant emotions as information ndash signals or a kind of

radar that contain information about risks what is going on in the minds of others and the weight

and relevance to be accorded to onelsquos own past experience

32

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Bargh J A Chen M amp Burrows L (1996) Automaticity of social behavior Direct effects of

trait construct and stereotype activation on action Journal of Personality and Social

Psychology 71 230-244

Baumeister R F Bratslavsky E Muraven M amp Tice D M (1998) Ego depletion Is the

active self a limited resource Journal of Personality and Social Psychology 74 1252-

1265

Bechara A Damasio A Tranel D amp Damasio A R (1997) Deciding advantageously before

knowing the advantageous strategy Science 275 1293-1295

Bower G H (1981) Mood and memory American Psychologist 36 129 ndash 148

Bower G H (1991) Mood congruity of social judgments In J P Forgas (Ed) Emotion and

social judgments (pp 31ndash53) Oxford Pergamon Press

Braun V amp Clarke V (2006) Using thematic analysis in psychology Qualitative Research in

Psychology 3(2) 77-101

Buck R (1999) The biological affects a typology Psychological Reveiw 106 301-336

Damasio A R (1994) Descartes‟ error Emotion reason and the human brain New York

Putnam

Dane E amp Pratt M G (2007) Exploring intuition and its role in managerial decision making

The Academy of Management Review 32 33-54

De Bondt W Palm F amp Wolff C (2004) Introduction to the special issue on behavioral

finance Journal of Empirical Finance 11 423-427

Dreyfus H amp Dreyfus S (2005) Expertise in real world contexts Organization Studies 26

779-792

Epstein S Pacini R Denes-Raj V amp Heier H (1996) Individual differences in intuitive-

experiential and analytical-rational thinking styles Journal of Personality and Social

Psychology 71 390-405

Ericsson K A Krampe R T amp Tesch-Roemer C (1993) The role of deliberate practice in the

acquisition of expert performance Psychological Review 100 363-406

Ericsson K A (2006) An introduction to the Cambridge Handbook of Expertise and Expert

Performance its development organization and content In K A Ericsson amp N Charness

amp P J Feltovich amp R R Hoffman (Eds) The Cambridge Handbook of Expertise and

Expert Performance 1st ed 3-20 Cambridge Cambridge University Press

Fama E F (1991) Efficient Capital Markets II The Journal of Finance 46 1575-1617

Fama E F (1998) Market efficiency long-term returns and behavioral finance Journal of

Financial Economics Vol 49 283-306

Fenton-OCreevy M Nicholson N Soane E amp Willman P (2005) Traders Risks Decisions

and Management in Financial Markets Oxford Oxford University Press

Finucane M L Alhakami A Slovic P amp Johnson S M (2000) The affect heuristic in

judgments of risks and benefits Journal of Behavioral Decision Making 13(1) 1-17

Forgas JP amp George JM (2001) Affective influences on judgments and behavior in

organizations An information processing perspective Organizational Behavior and

Human Decision Processes 86(1) 3-34

Grandey AA (2000) Emotion Regulation in the Workplace A new way to conceptualize

Emotional Labor Journal of Occupational Health Psychology 5(1) 95-110

33

Grandey A A (2003) When the show must go on surface acting and deep acting as

determinants of emotional exhaustion and peer-rated service delivery Academy of

Management Journal 46 86-96

Gray JA (1999) Cognition emotion conscious experience and the brain In T Dalgleish and

MJ Power (Eds) Handbook of Cognition and Emotion (pp83-102) Chichester England

Wiley

Gross J (2002) Emotion regulation affective cognitive and social consequences

Psychophysiology 39 281

Gross J J amp John O P (2003) Individual differences in two emotion regulation processes

Implications for affect relationships and well-being Journal of Personality and Social

Psychology 85(2) 348-362

Gross J J amp Thompson R A (2007) Emotion regulation Conceptual foundations In J J

Gross (Ed) Handbook of emotion regulation New York NY Guilford Press

Isen A M Shalker T E Clark M amp Karp L (1978) Affect accessibility of material in

memory and behavior A cognitive loop Journal of Personality and Social Psychology

36 1-12

Johnson E amp Tversky A (1983) Affect generalization and the perception of risk Journal of

Personality and Social Psychology 45(1) 20-31

Kavanaugh D amp Bower G (1985) Mood and self-efficacy Impact of job and sadness on

perceived capabilities Cognitive Therapy and Research 9 507-525

Klein G A Calderwood R amp Clinton Cirocco A (1986) Rapid decision-making on the

fireground Human Factors and Ergonomics Society 30th Annual Meeting Vol 1 576-

580

Knorr-Cetina K amp Brugger U (2002) Traders Engagement with Markets A Postsocial

Relationship Theory Culture and Society 19(5-6) 161-185

Labouvie-Vief G (2003) Dynamic integration Affect cognition and the self in adulthood

Current Directions in Psychological Science 12 201-206

Lerner J S amp Keltner D (2001) Fear anger and risk Journal of Personality and Social

Psychology 81(1) 146-159

Lerner J S Small D A amp Loewenstein G (2004) Heart strings and purse strings Carryover

effects of emotions on economic decisions Psychological Science 15(5) 337-341

Lo A Repin D amp Steenbarger B (2005) Fear and greed in financial markets A clinical study

of day traders American Economic Review 95 352-359

Lo A W amp Repin D V (2002) The Psychophysiology of Real-Time Financial Risk

Processing Journal of Cognitive Neuroscience 14 323-339

MacKenzie D (2006) An Engine Not A Camera How Financial Models Shape Markets

Cambridge Mass MIT Press

Mayer JD amp Hanson A (1995) Mood-congruent judgment over time Personality and Social

Psychology Bulletin 21 237-244

Mayer JD DiPaolo M and Salovey P (1990) Perceiving affective content in ambiguous

visual stimuli a component of emotional intelligence Journal of Personality Assessment

54 772-781

Miller G (2003) The cognitive revolution a historical perspective Trends in Cognitive Science

7 141

Muraven M amp Baumeister R F (2000) Self-regulation and depletion of limited resources

Does self-control resemble a muscle Psychological Bulletin 126 247-259

Nicholson N (2000) Managing the Human Animal London ThomsonTexere

34

Peterson R L (2007) Affect and financial decision-making How neuroscience can inform

market participants The Journal of Behavioral Finance 8(2) 70-78

Pham M T (2004) The logic of feeling Journal of Consumer Psychology 14 360-369

Phelps E A (2006) Emotion and cognition Insights from studies of the human amygdala

Annual Review of Psychology 57 27-53

Sayer A (1997) Essentialism social constructionism and beyond The Sociological Review 45

453-487

Shapira Z amp Venezia I (2001) Patterns of behavior of professionally managed and

independent investors Journal of Banking and Finance 25 1573ndash1587

Schunk D amp Betsch C (2006) Explaining the heterogeneity in utility functions by individual

differences in decision modes Journal of Economic Psychology 27 386-401

Schwager J D (1993) Market Wizards Interviews with Top Traders New York Collins

Schwarz N amp Clore G L (1983) Mood misattribution and judgments of well-being

Informative and directive functions of affective states Journal of Personality and Social

Psychology 45 513-523

Seo M G Barrett L F amp Bartunek J M (2004) The role of affective experience in work

motivation Academy of Management Review 29 423-439

Seo M G amp Barrett L F (2007) Being emotional during decision makingmdashgood or bad An

empirical investigation The Academy of Management Journal 50 923-940

Shefrin H (2000) Beyond Greed and Fear Understanding Behavioral Finance and the

Psychology of Investing Boston MA Harvard Business School Press

Stokes A F Kemper K amp Kite K (1997) Aeronautical decision making cue recognition and

expertise under time pressure In C E Zsambok amp G Klein (Eds) Naturalistic Decision

Making pp 183-196 Mahwah NJ Erlbaum

Tamir M (2005) Dont worry be happy Neuroticism trait-consistent affect regulation

and performance Journal of Personality and Social Psychology 89 (3) 449 ndash

461

Thaler R H (1985) Mental accounting and consumer choice Marketing Science 4(3) 199-214

Thaler R H (1993) Advances In Behavioral Finance New York Russel Sage Foundation

Thaler R H (1999) Mental accounting matters Journal of Behavioral Decision Making 12(3)

183-206

Tiedens L amp Linton S (2001) Judgment under emotional certainty and uncertainty the effects

of specific emotions on information processing Journal of Personality and Social

Psychology 81(6) 973-988

Todd P M amp Gigerenzer G (2007) Environments that make us smart Ecological rationality

Current Directions in Psychological Science 16 167-171

Totterdell P Briner R B Parkinson B amp Reynolds S (1996) Fingerprinting time series

dynamic patterns in self-report and performance measures uncovered by a graphical non-

linear method British Journal of Psychology 87(1) 43-60

Weber M amp Welfens F (2008) Splitting the Disposition Effect Asymmetric Reactions

Towards bdquoSelling winners‟ and bdquoHolding Losers‟ Working Paper University of

Mannheim

Wright WF amp Bower GH (1992) Mood effects on subjective probability assessment

Organizational Behavior and Human Decision Processes 52 276ndash91

18

necessarily help the new situation on what to do but it just helps your judgmentrdquo 55

high experience high pay

There was a notable absence of avoidant behavior in this group Several participants told

stories which implied a significant degree of persistence in the face of negative emotion

ldquoI had one very bad year from which I learned quite a lot I learned that the

overshooting can go on for a very long time it can be very painful you can hit risk

limits hellip I did not want to get out of the trades so kept the trades and then next year

they made more money than they lost I don‟t think I panicked but I was getting calls

from the CEO Reason prevailed in the end Emotionally it was not easy to cope

with There were times when the desk was down close to $100m I lost almost that

much in days I was under a lot of pressure from New York because they did not

understand my positions but in the end we managed to keep the positions and made

money the next year The hardest thing was persuading others that I had a good

traderdquo 14 high experience high pay

This willingness among some of the high performing traders to experience negative

emotion in order to achieve longer term goals is consistent with Labouvie-Vieflsquos (2003)

argument that positive self-development requires not just strategies to optimize positive affect

but also the ability to tolerate tension and negativity to achieve long term goals

However there may be another important reason why response modulation strategies are

maladaptive for traders As we have seen above while poorly regulated emotions carry over to

subsequent trading and risk biasing subsequent trading behavior emotion cues generated by

reactions to information relevant to current trading under time constraints play an important role

in guiding attention and rapidly choosing appropriate action Both poor regulation of non-

19

relevant emotions and recourse to the attempted suppression of all feeling run the risk of masking

these important cues

The Role of Managers in Emotion Regulation

Further evidence of the importance of emotions and their regulation to trader performance

came from interviews with trader managers A few managers described their role in primarily

technical terms focusing on risk management and personal supervision of problematic trades

However many of those we interviewed clearly saw regulating the emotions of traders who

worked for them as a key element in managing trader performance

ldquoI have to play the role of director of emotions in the sense that when they are down

you have to boost their morale and when they are too excited they want to do stupid

things I have to cool them downrdquo 119 senior manager

ldquoI care deeply because I have tremendous pride in the people herehellipThe stress is

generated by fear entirely and it‟s fear of what I guess everyone has their

insecurities whether it‟s being fired losing lots of money and appearing stupid in

front of their peer group Whatever it is it‟s definitely fear and if you can take the

fear out of the situation they perform betterrdquo 123 senior trader manager high

experience high pay

Many traders described such episodes of managerial intervention as crucial to their

learning and development For example-

ldquoI lost $1m in the first 10 days of the year This was at a time when if you made $1m

in a year that was huge I was devastated and my boss asked me for lunch at the

weekend - I thought that was the end of my career My boss said bdquoa lot of the guys

think you‟re OK but they are worried you are going to be afraid to trade that you‟re

20

going to be gun shy and lose your confidence We want you to know that we like you

and if you think you‟ve got to buy them buy them and if you‟ve got to sell them sell

them but whatever you do don‟t stop trading‟ So that was a huge relief Since then I

don‟t get too depressed about losing money although there are always good days

and bad daysrdquo 25 low experience medium performance

Other managers clearly gave thought to the relative strengths and weaknesses of more

intuitive versus more analytical traders in their decisions about matching traders to roles -

ldquoA gut trader should trade a liquid market - he might change his feel so he needs to

get out The analytical trader who thinks much more about what he‟s doing will

change their mind less often and trade with a different time frame A gut trader can

be bullish in the morning The analytical trader will look at something for a week

and then put on a position - less important to get in and out He doesn‟t need to be in

a liquid market - in an emerging market you need a more analytical traderrdquo 122

Manager

ldquoDerivatives are very quantitative and people think if you have a PhD you will be

very good because you have an understanding of options theory but this is not

always the case and you tend to overlook things Although you can put the

parameters into the model there are still a lot of things which are uncertain

Sometimes adding a more qualitative feel to it ndashbdquoyes that‟s what the model says but

the risk doesn‟t look right‟ hellip I tend to have a mixture of people on the desk - those

who are more quantitative and those who are more common sense or gut instinct

traders Having the blend is quite useful for bouncing ideasrdquo 124 Manager

These reflections have implications for management strategies in trading environments or

indeed any others where the main role of the operative is complex decision-making under

21

constraints of time and uncertain and incomplete information We consider these points further in

our discussion

Emotional Cues and the Use of Intuition

The second broad theme concerned the role of emotional cues in traderslsquo decision-

making Many of the traders discussed this aspect of emotion as intuition Traderslsquo own accounts

and conceptualizations of intuition fit well with Dane and Prattlsquos (200740) definition of intuition

as ―affectively charged judgments that arise through rapid non-conscious and holistic

associations For example -

ldquo[W]ithout a doubt some of the best bargains are the ones you dont do You know

theyre bad bargains You know It‟s a gut feel Youve looked at the playing field and

you just know this is a bad bargainrdquo 106 high experience moderate pay

Some of the traders see a more subtle and sophisticated role for emotions which represent

an unconscious drawing on experience -

ldquoI think many people do say theyre gut-feel traders but perhaps theyre not analyzing

what theyre actually thinking and theyre seeing a lot of customer flow and a lot of

buyers and they probably dont necessarily realize the reasons why they want to buy

But there are very good traders that say theyre trading off gut feel that I believe

actually have probably reasonable information reasonable thoughts behind it but

they wouldnt literally toss a coinrdquo 55 high experience high pay

Feelings are also seen as a kind of radar directing attention and shaping perceptions

around opportunities to enable them to be promptly seized

ldquoI think what a trader has to have is not necessarily this gut feeling but this nose for

opportunities If an opportunity comes along you have to be able to spot it and see it

22

and sometimes people you typically find in this business - an opportunity is there and

they cant see it and then its taken by someone else and its like oh yeah that was a

good idea but it is gonerdquo 58 high experience low pay

Not only do feelings act as a kind of radar directing attention but they do so in a way that

enables rapid decision making under time pressure As one trader noted -

ldquoTrading includes stuff which is beyond trading Trading is when you make decisions

involving financial risk that have two qualities you have to make them in someone

else‟s time schedule not your own and when you make a decision you have to be

confident when you have incomplete or imperfect information and therefore there

must be some kind of intuitive or qualitative elementrdquo 121 high experience high pay

Experienced traders made much more reference to intuition or gut feellsquo as they often

phrased it than less experienced traders However again there were important differences

between low and high paid traders in the high experience group Low paid traders who talked

about the use of intuition often talked of it in terms of a rather mysterious process You either had

a feeling or not For example

ldquoIt‟s almost like a sixth sense Something comes over you and you feel like - yes I

know they‟re going to be looking to buy these later on or looking to sell these later

onrdquo 116 high experience low pay

By contrast the top paid group tended to reflect critically about the origins of their

intuitions and to bring them together with more objective information -

ldquoIf I do fancy a stock - you have a feeling it feels right it has done nothing for like

two or three months and you‟ve seen sellers and they start to dwindle and it is just

stagnant and then you have a look on the charts you refer to the technical side as

well as the emotional side of the trade So you know a combination of technical and

23

emotional as well as what the analyst thinks as well so you sort of bring the

instruments you have available to you to make the decision rather than the snap

[snaps his finger] I fancy buying thatrdquo 101 high experience high pay

ldquoI may examine opportunities based on intuition that something is going to happen

but the decision is based on something I think is rationalrdquo 68 medium experience

high pay

Reported use of intuition does seem to increase with trader experience However traderslsquo

engagement with their feelings is qualitatively different between low and high performers High

performing traders seem to engage with their intuitions at a meta-cognitive level and make

judgments about the relevance of these feelings to the decision at hand This is consistent with

the growing literature on expertise which points to experience as a necessary but insufficient

condition for the development of expertise and points to the role of extended critical engagement

with practice in developing expertise (Ericsson 2006 Ericsson Krampe amp Tesch-Roemer

1993)

Traders were not universally positive about the role of intuition in market decision making

Some believed reliance on such feelings yields poor outcomes -

ldquoMany traders feel that models have been developed by academics who do not know

markets and [traders] think that gut feeling is more important My experience is that

this is 100 wrong and computers can make better decisions than tradersrdquo 37

medium experience medium pay

Overall however the data support a picture of expert traders having a meta-cognitive

engagement with emotion regulation This process entails discrimination between emotions in

terms of their relevance to the decision at hand and effective strategies for emotion regulation to

enhance performance

24

Empathy

The third identified theme was empathy monitoring own emotions as information

about what other market players might be feeling Only five traders explicitly described

using their own capacity for empathy as a decision making tool Although not frequent in

our data these examples are important illustrating that there is a path for traders beyond

simply seeking to eliminate or reduce the intensity of their emotions These traders

fostered feelings as a source of information about other market actors which they managed

and used in a self-aware analysis One trader described using his own fear as an indicator

of fear in the market Another described actively imagining the feelings of other market

actors ―trying to put myself in [the Bank of England Governorlsquos] feet to develop a feel for

how he feels and thinks 14 high experience high pay

Three traders talked about an emotional affinity with the feelings of people in

national markets (Spain 34 high experience medium pay Italy 70 medium experience

low pay and Japan 117 high experience medium pay) with whom they shared a common

culture and propensity to react emotionally in similar ways to the same market events This

group was small but these data broaden the picture of traders reasoning with emotionlsquo

and offer a potentially rich and fruitful avenue for future research

DISCUSSION AND CONCLUSIONS

To ask whether emotion disturbs or aids traderslsquo decision-making is to ask the wrong

question Traderslsquo emotions and cognition are inextricably linked Therefore a more productive

question to ask in this context is whether there are more or less effective strategies for managing

and using emotion in financial decision-making This has been the thrust of our analysis which

25

sought to move beyond previous work that simply characterizes emotional arousal as detrimental

to performance (eg Lo et al 2005 Schunk and Bersh 2006) The study contributes to our

understanding of the role of emotions in work and decision-making in several distinct ways In

contributing to our understanding of the role of emotion at work this study has particular

relevance in that it considers a work domain which has been theorized as strongly normatively

rational as opposed to a work domain (such as negotiation or customer service) where

performance is primarily dependent on effective social interaction However it is clear from this

study that even within such an analysis-intensive domain as financial trading emotion plays a

central role Traders and their managers are frequently preoccupied with the effective regulation

and use of emotions in their work Our work points to the value of a more nuanced understanding

which considers the role of emotions in decision-making the differential impact of various

emotion regulation strategies the conditions under which gut-feellsquo may support effective

decision-making and the role of empathic responses in understanding the behavior of other

market actors

Effective emotion regulation seems to be a critical success factor in trading for our

findings suggest that the strategies for emotion regulation adopted by expert higher performing

traders are qualitatively different from those of lower performing traders In particular higher

performers are more inclined to regulate emotions through attentional deployment and cognitive

change and may display a willingness to cope with negative feelings in the interests of

maintaining objectivity and pursuing longer term goals The kind of attention and appraisal-

focused emotion regulation strategies used by high-performing traders do not seem to be too

cognitively expensive and are effective in reducing negative experience of emotion (Gross

2002) By contrast less expert traders engage either in avoidant behaviors such as walking

away from the desk or invest significant cognitive effort in modulating their emotional

26

responses This extends previous findings (eg Grandey 2003) concerning the performance

benefits of antecedent versus response-focused emotion regulation in the context of emotion

labor to the very different context of financial decision-making Our findings also suggest that

willingness to endure negative feelings in pursuit of long-term goals may be more adaptive than

purely defensive strategies aimed at maintaining positive feelings (Labouvie-Vief 2003 Tamir

2005)

This study also provides evidence that more effective emotion regulation strategies can be

learned in a financial decision-making context While an individuallsquos preferred approach to

emotion regulation is likely to be influenced by personality traits neuroticism and extroversion in

particular (Gross amp John 2003) our interviews with traders and their managers also point to the

importance of traderslsquo learned strategies for emotion regulation Importantly our study also

suggests that defensive emotion regulation strategies may be problematic because they reduce

opportunities to exercise expert intuition

These findings go well beyond prior research on emotion regulation and performance

(eg Grandey 2003) which has a primary focus on performance in the context of interpersonal

interaction Our findings uniquely address the performance of professional traders for whom

performance is not primarily dependent on interpersonal interaction and which has been

theorized as strongly rational involving the selection of optimal strategies in the face of complex

cognitive demands and requiring attention to a large volume of information with uncertain

relevance

Turning to intuition traders in our study mirror the balance of opinion in the research

literature on intuition They are equivocal about whether feelings and hunches about appropriate

courses of action lead to better or worse outcomes than purely rational analysis There were

strong feelings on both sides with traders being quite evenly divided between the two camps

27

However again our study suggests the importance of a more nuanced approach than simply

asking whether reliance on intuition is good or bad and points towards the conditions in which

reliance on intuitive judgment may be more and less effective The findings suggest that one

characteristic of higher performing traders may be a greater willingness to reflect critically about

their intuitions and feelings about trading These traders often reported relying on intuition but

they tend to weigh their feelings critically alongside other evidence and to reflect about the

provenance of those feelings Lower performing traders may rely on feelings alone and show

less propensity to think critically about the source of hunches This reflection by expert traders

about the provenance of feelings may be particularly salient given Schwarz and Clorelsquos (1983

2003) finding that the impact of emotions on behavior is reduced or disappears when the

relevance of those emotions is explicitly called into question

That traderslsquo reliance on affective cues in decision-making can support effective

performance is consistent with Damasiolsquos observation that deciding advantageously depends on

the use of affective cues in both learning and deciding (Bechara et al 1997 Damasio 1994)

There is increasing evidence that humans are naturally proficient in the ability to acquire

expertise and that encapsulation of experience in expert intuition and perception via system one

provides a means of by-passing cognitive limits (Ericsson 2006) The nature of expertise could

counteract the inherent environmental uncertainties that Tiedens and Linton (2001) identified as

leading to more conscious appraisal of information While not an unequivocal result our finding

of greater critical engagement among higher performing traders with intuitions and their more

sophisticated deployment of intuition in combination with analysis suggests an important

direction for future research

The small number of accounts of traders monitoring their own emotions as a source of

information about the emotions of other market actors was intriguing These data suggest a

28

possibly productive avenue for future research We do not have evidence of performance

outcomes of predictive uses of empathy in this manner but our findings are consistent with

arguments that the evolution of the human brain has been significantly driven by the need to

predict the behavior of other humans often via subtle cues (eg Nicholson 2000)

We suggest that the identification of links between decision-making performance and

emotion regulation in this study has important implications for theory development in two key

fields First while somewhat tacit in much of the literature the implication of many claims in the

decision-making and behavioral finance literatures is that a range of key decision-making biases

are underpinned by mechanisms which involve emotion processes One relevant explicit example

is Thalerlsquos (1985 1999) account of the role of hedonic editinglsquo in mental accounting and the

disposition effect (the tendency to hold losing assets longer than winning assets) This explains

key biases in terms of the desire to maintain positive hedonic tone There is evidence too of

interpersonal variation in propensity to exhibit such biases for example investors vary in their

propensity to exhibit the disposition effect (Shapira amp Venezia 2001 Weber amp Welfens 2008)

In this study we have seen that traders seek to regulate emotions in order to avoid decision biases

and that higher performing traders typically exhibit more sophisticated emotion regulation

strategies This suggests that it would be productive to investigate the role of emotion regulation

as one key source of interpersonal variation in susceptibility to a range of decision biases

A second implication concerns the role of emotion in expert performance While much

attention has been paid to the nature of cognition in expert performance the expertise literature

hardly considers the role of emotion For example examining the index of the Cambridge

Handbook of Expertise and Expert Performance (Ericsson et al 2006) reveals very few

references to emotion and these are peripheral to the main arguments of the chapters which

contain them Our research suggests first that effective emotion regulation may be an important

29

facet of expert performance and second that greater attention should be paid to the interactions

between emotion emotion regulation and expert intuition Further research could test the

proposition that effective expert intuition is reduced by reliance on defensive emotion regulation

strategies

While our study points to the importance of intuition in traderslsquo work it may be that the

relative importance of intuition and analysis vary with task characteristics such as time span of

decision-making Certainly this seemed to be the view of several senior managers with

responsibility for allocating traders to trading roles The interplay that expert traders described

between intuition and analysis is also intriguing The importance of context to the role of affect

in decision-making has been noted in prior research (Forgas amp George 2001) Further research

could usefully explore this aspect of traderslsquo expertise

This study also contains some potentially important implications for practice First it

points to the importance of learned strategies for emotion regulation and the need for effective

support for their development Second our data directly and indirectly point to the key role of

management in this process Our findings suggest that there may be considerable benefits to

skilled managerial interventions that help to steer effective emotion regulation and support

inexperienced traders in developing emotion regulation skills Additionally managers may be

able to help traders to understand the productive role that critically engaged experience-based

intuition may play in decision-making Our evidence suggests that many high performing traders

deploy a reflective and critical approach to the use and development of intuition well-founded in

experience Managers could help to guide this process through coaching The contextual

dependence of high quality intuitions suggests they are quite domain specific and may not

transfer across contexts As several informants told us this is especially true for traders operating

under different market conditions

30

We heard repeated concerns from senior managers who worried about traders who had

not seen a bear market and would not operate well when that occurred We also heard many

stories of people transferring between trading areas and needing time to re-contextualize

expertise before their intuitions could be considered reliable Thus managers have a role in

helping traders to extend the boundaries of their expertise Given recent events in financial

markets our findings may be relevant to an understanding of how traders react under massively

changed trading conditions and how those reactions might either contribute to or result from

market volatility

This research has some important limitations First although we have argued for the

importance of an account of emotion that includes the experience of emotion as Pham (2004

368) notes the affective system is focused on the present Thus people can be poor at recalling or

predicting emotions There are limits to the human capacity to introspect on emotion processes

and to recall the experience of emotion These limits are also subject to wide individual

differences The capacity for introspection and recall will also vary between individuals For this

reason studies such as ours need to be complemented with more physiologically based research

as well as further qualitative and quantitative studies

Second as in all work contexts traders subscribe to norms of socially sanctioned

behavior and to common narratives about the nature of their work We have not treated emotional

labor as a primary component of traderslsquo work and performance The majority of work

interactions are carried out through highly abbreviated electronic exchanges which provide a poor

medium for the communication of emotion However there is a sense in which traders engage in

emotional labor since especially for novices there are social pressures to comply with display

rules which emphasize the avoidance of displays of strong emotion One common narrative

thread that ran though many traderslsquo accounts of their work was a representation of trading work

31

as principally concerned with rational analysis from which emotions are a dangerous distraction

This narrative seemed particularly strong in the accounts of less experienced traders Although as

we have seen the mask would often slip as they discussed their work Some traderslsquo accounts

were clearly colored by a desire to conform to this mode of self-presentation In consequence it is

possible that in our interviews and during data analysis we were at times unable to distinguish

effectively between defensive denial of emotion and effective regulation of emotion This would

be another avenue for future research

To conclude we know that emotions are a rich source of experience in everyday life but

at the same time in work contexts they can be a source of vulnerability a wayward influence over

judgment and a source of disturbance to process The more ―rational-economic such

environments are the more likely we are to hold such beliefs (Nicholson 2000) Our research

illustrates that this position is false or at best short-sighted In the hyper-rational world of

trading in financial markets we did find some evidence that emotions disturbed performance but

mostly among the inexperienced and un-reflective traders The best traders are able to regulate

emotions effectively and incorporate relevant emotions as information ndash signals or a kind of

radar that contain information about risks what is going on in the minds of others and the weight

and relevance to be accorded to onelsquos own past experience

32

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Bargh J A Chen M amp Burrows L (1996) Automaticity of social behavior Direct effects of

trait construct and stereotype activation on action Journal of Personality and Social

Psychology 71 230-244

Baumeister R F Bratslavsky E Muraven M amp Tice D M (1998) Ego depletion Is the

active self a limited resource Journal of Personality and Social Psychology 74 1252-

1265

Bechara A Damasio A Tranel D amp Damasio A R (1997) Deciding advantageously before

knowing the advantageous strategy Science 275 1293-1295

Bower G H (1981) Mood and memory American Psychologist 36 129 ndash 148

Bower G H (1991) Mood congruity of social judgments In J P Forgas (Ed) Emotion and

social judgments (pp 31ndash53) Oxford Pergamon Press

Braun V amp Clarke V (2006) Using thematic analysis in psychology Qualitative Research in

Psychology 3(2) 77-101

Buck R (1999) The biological affects a typology Psychological Reveiw 106 301-336

Damasio A R (1994) Descartes‟ error Emotion reason and the human brain New York

Putnam

Dane E amp Pratt M G (2007) Exploring intuition and its role in managerial decision making

The Academy of Management Review 32 33-54

De Bondt W Palm F amp Wolff C (2004) Introduction to the special issue on behavioral

finance Journal of Empirical Finance 11 423-427

Dreyfus H amp Dreyfus S (2005) Expertise in real world contexts Organization Studies 26

779-792

Epstein S Pacini R Denes-Raj V amp Heier H (1996) Individual differences in intuitive-

experiential and analytical-rational thinking styles Journal of Personality and Social

Psychology 71 390-405

Ericsson K A Krampe R T amp Tesch-Roemer C (1993) The role of deliberate practice in the

acquisition of expert performance Psychological Review 100 363-406

Ericsson K A (2006) An introduction to the Cambridge Handbook of Expertise and Expert

Performance its development organization and content In K A Ericsson amp N Charness

amp P J Feltovich amp R R Hoffman (Eds) The Cambridge Handbook of Expertise and

Expert Performance 1st ed 3-20 Cambridge Cambridge University Press

Fama E F (1991) Efficient Capital Markets II The Journal of Finance 46 1575-1617

Fama E F (1998) Market efficiency long-term returns and behavioral finance Journal of

Financial Economics Vol 49 283-306

Fenton-OCreevy M Nicholson N Soane E amp Willman P (2005) Traders Risks Decisions

and Management in Financial Markets Oxford Oxford University Press

Finucane M L Alhakami A Slovic P amp Johnson S M (2000) The affect heuristic in

judgments of risks and benefits Journal of Behavioral Decision Making 13(1) 1-17

Forgas JP amp George JM (2001) Affective influences on judgments and behavior in

organizations An information processing perspective Organizational Behavior and

Human Decision Processes 86(1) 3-34

Grandey AA (2000) Emotion Regulation in the Workplace A new way to conceptualize

Emotional Labor Journal of Occupational Health Psychology 5(1) 95-110

33

Grandey A A (2003) When the show must go on surface acting and deep acting as

determinants of emotional exhaustion and peer-rated service delivery Academy of

Management Journal 46 86-96

Gray JA (1999) Cognition emotion conscious experience and the brain In T Dalgleish and

MJ Power (Eds) Handbook of Cognition and Emotion (pp83-102) Chichester England

Wiley

Gross J (2002) Emotion regulation affective cognitive and social consequences

Psychophysiology 39 281

Gross J J amp John O P (2003) Individual differences in two emotion regulation processes

Implications for affect relationships and well-being Journal of Personality and Social

Psychology 85(2) 348-362

Gross J J amp Thompson R A (2007) Emotion regulation Conceptual foundations In J J

Gross (Ed) Handbook of emotion regulation New York NY Guilford Press

Isen A M Shalker T E Clark M amp Karp L (1978) Affect accessibility of material in

memory and behavior A cognitive loop Journal of Personality and Social Psychology

36 1-12

Johnson E amp Tversky A (1983) Affect generalization and the perception of risk Journal of

Personality and Social Psychology 45(1) 20-31

Kavanaugh D amp Bower G (1985) Mood and self-efficacy Impact of job and sadness on

perceived capabilities Cognitive Therapy and Research 9 507-525

Klein G A Calderwood R amp Clinton Cirocco A (1986) Rapid decision-making on the

fireground Human Factors and Ergonomics Society 30th Annual Meeting Vol 1 576-

580

Knorr-Cetina K amp Brugger U (2002) Traders Engagement with Markets A Postsocial

Relationship Theory Culture and Society 19(5-6) 161-185

Labouvie-Vief G (2003) Dynamic integration Affect cognition and the self in adulthood

Current Directions in Psychological Science 12 201-206

Lerner J S amp Keltner D (2001) Fear anger and risk Journal of Personality and Social

Psychology 81(1) 146-159

Lerner J S Small D A amp Loewenstein G (2004) Heart strings and purse strings Carryover

effects of emotions on economic decisions Psychological Science 15(5) 337-341

Lo A Repin D amp Steenbarger B (2005) Fear and greed in financial markets A clinical study

of day traders American Economic Review 95 352-359

Lo A W amp Repin D V (2002) The Psychophysiology of Real-Time Financial Risk

Processing Journal of Cognitive Neuroscience 14 323-339

MacKenzie D (2006) An Engine Not A Camera How Financial Models Shape Markets

Cambridge Mass MIT Press

Mayer JD amp Hanson A (1995) Mood-congruent judgment over time Personality and Social

Psychology Bulletin 21 237-244

Mayer JD DiPaolo M and Salovey P (1990) Perceiving affective content in ambiguous

visual stimuli a component of emotional intelligence Journal of Personality Assessment

54 772-781

Miller G (2003) The cognitive revolution a historical perspective Trends in Cognitive Science

7 141

Muraven M amp Baumeister R F (2000) Self-regulation and depletion of limited resources

Does self-control resemble a muscle Psychological Bulletin 126 247-259

Nicholson N (2000) Managing the Human Animal London ThomsonTexere

34

Peterson R L (2007) Affect and financial decision-making How neuroscience can inform

market participants The Journal of Behavioral Finance 8(2) 70-78

Pham M T (2004) The logic of feeling Journal of Consumer Psychology 14 360-369

Phelps E A (2006) Emotion and cognition Insights from studies of the human amygdala

Annual Review of Psychology 57 27-53

Sayer A (1997) Essentialism social constructionism and beyond The Sociological Review 45

453-487

Shapira Z amp Venezia I (2001) Patterns of behavior of professionally managed and

independent investors Journal of Banking and Finance 25 1573ndash1587

Schunk D amp Betsch C (2006) Explaining the heterogeneity in utility functions by individual

differences in decision modes Journal of Economic Psychology 27 386-401

Schwager J D (1993) Market Wizards Interviews with Top Traders New York Collins

Schwarz N amp Clore G L (1983) Mood misattribution and judgments of well-being

Informative and directive functions of affective states Journal of Personality and Social

Psychology 45 513-523

Seo M G Barrett L F amp Bartunek J M (2004) The role of affective experience in work

motivation Academy of Management Review 29 423-439

Seo M G amp Barrett L F (2007) Being emotional during decision makingmdashgood or bad An

empirical investigation The Academy of Management Journal 50 923-940

Shefrin H (2000) Beyond Greed and Fear Understanding Behavioral Finance and the

Psychology of Investing Boston MA Harvard Business School Press

Stokes A F Kemper K amp Kite K (1997) Aeronautical decision making cue recognition and

expertise under time pressure In C E Zsambok amp G Klein (Eds) Naturalistic Decision

Making pp 183-196 Mahwah NJ Erlbaum

Tamir M (2005) Dont worry be happy Neuroticism trait-consistent affect regulation

and performance Journal of Personality and Social Psychology 89 (3) 449 ndash

461

Thaler R H (1985) Mental accounting and consumer choice Marketing Science 4(3) 199-214

Thaler R H (1993) Advances In Behavioral Finance New York Russel Sage Foundation

Thaler R H (1999) Mental accounting matters Journal of Behavioral Decision Making 12(3)

183-206

Tiedens L amp Linton S (2001) Judgment under emotional certainty and uncertainty the effects

of specific emotions on information processing Journal of Personality and Social

Psychology 81(6) 973-988

Todd P M amp Gigerenzer G (2007) Environments that make us smart Ecological rationality

Current Directions in Psychological Science 16 167-171

Totterdell P Briner R B Parkinson B amp Reynolds S (1996) Fingerprinting time series

dynamic patterns in self-report and performance measures uncovered by a graphical non-

linear method British Journal of Psychology 87(1) 43-60

Weber M amp Welfens F (2008) Splitting the Disposition Effect Asymmetric Reactions

Towards bdquoSelling winners‟ and bdquoHolding Losers‟ Working Paper University of

Mannheim

Wright WF amp Bower GH (1992) Mood effects on subjective probability assessment

Organizational Behavior and Human Decision Processes 52 276ndash91

19

relevant emotions and recourse to the attempted suppression of all feeling run the risk of masking

these important cues

The Role of Managers in Emotion Regulation

Further evidence of the importance of emotions and their regulation to trader performance

came from interviews with trader managers A few managers described their role in primarily

technical terms focusing on risk management and personal supervision of problematic trades

However many of those we interviewed clearly saw regulating the emotions of traders who

worked for them as a key element in managing trader performance

ldquoI have to play the role of director of emotions in the sense that when they are down

you have to boost their morale and when they are too excited they want to do stupid

things I have to cool them downrdquo 119 senior manager

ldquoI care deeply because I have tremendous pride in the people herehellipThe stress is

generated by fear entirely and it‟s fear of what I guess everyone has their

insecurities whether it‟s being fired losing lots of money and appearing stupid in

front of their peer group Whatever it is it‟s definitely fear and if you can take the

fear out of the situation they perform betterrdquo 123 senior trader manager high

experience high pay

Many traders described such episodes of managerial intervention as crucial to their

learning and development For example-

ldquoI lost $1m in the first 10 days of the year This was at a time when if you made $1m

in a year that was huge I was devastated and my boss asked me for lunch at the

weekend - I thought that was the end of my career My boss said bdquoa lot of the guys

think you‟re OK but they are worried you are going to be afraid to trade that you‟re

20

going to be gun shy and lose your confidence We want you to know that we like you

and if you think you‟ve got to buy them buy them and if you‟ve got to sell them sell

them but whatever you do don‟t stop trading‟ So that was a huge relief Since then I

don‟t get too depressed about losing money although there are always good days

and bad daysrdquo 25 low experience medium performance

Other managers clearly gave thought to the relative strengths and weaknesses of more

intuitive versus more analytical traders in their decisions about matching traders to roles -

ldquoA gut trader should trade a liquid market - he might change his feel so he needs to

get out The analytical trader who thinks much more about what he‟s doing will

change their mind less often and trade with a different time frame A gut trader can

be bullish in the morning The analytical trader will look at something for a week

and then put on a position - less important to get in and out He doesn‟t need to be in

a liquid market - in an emerging market you need a more analytical traderrdquo 122

Manager

ldquoDerivatives are very quantitative and people think if you have a PhD you will be

very good because you have an understanding of options theory but this is not

always the case and you tend to overlook things Although you can put the

parameters into the model there are still a lot of things which are uncertain

Sometimes adding a more qualitative feel to it ndashbdquoyes that‟s what the model says but

the risk doesn‟t look right‟ hellip I tend to have a mixture of people on the desk - those

who are more quantitative and those who are more common sense or gut instinct

traders Having the blend is quite useful for bouncing ideasrdquo 124 Manager

These reflections have implications for management strategies in trading environments or

indeed any others where the main role of the operative is complex decision-making under

21

constraints of time and uncertain and incomplete information We consider these points further in

our discussion

Emotional Cues and the Use of Intuition

The second broad theme concerned the role of emotional cues in traderslsquo decision-

making Many of the traders discussed this aspect of emotion as intuition Traderslsquo own accounts

and conceptualizations of intuition fit well with Dane and Prattlsquos (200740) definition of intuition

as ―affectively charged judgments that arise through rapid non-conscious and holistic

associations For example -

ldquo[W]ithout a doubt some of the best bargains are the ones you dont do You know

theyre bad bargains You know It‟s a gut feel Youve looked at the playing field and

you just know this is a bad bargainrdquo 106 high experience moderate pay

Some of the traders see a more subtle and sophisticated role for emotions which represent

an unconscious drawing on experience -

ldquoI think many people do say theyre gut-feel traders but perhaps theyre not analyzing

what theyre actually thinking and theyre seeing a lot of customer flow and a lot of

buyers and they probably dont necessarily realize the reasons why they want to buy

But there are very good traders that say theyre trading off gut feel that I believe

actually have probably reasonable information reasonable thoughts behind it but

they wouldnt literally toss a coinrdquo 55 high experience high pay

Feelings are also seen as a kind of radar directing attention and shaping perceptions

around opportunities to enable them to be promptly seized

ldquoI think what a trader has to have is not necessarily this gut feeling but this nose for

opportunities If an opportunity comes along you have to be able to spot it and see it

22

and sometimes people you typically find in this business - an opportunity is there and

they cant see it and then its taken by someone else and its like oh yeah that was a

good idea but it is gonerdquo 58 high experience low pay

Not only do feelings act as a kind of radar directing attention but they do so in a way that

enables rapid decision making under time pressure As one trader noted -

ldquoTrading includes stuff which is beyond trading Trading is when you make decisions

involving financial risk that have two qualities you have to make them in someone

else‟s time schedule not your own and when you make a decision you have to be

confident when you have incomplete or imperfect information and therefore there

must be some kind of intuitive or qualitative elementrdquo 121 high experience high pay

Experienced traders made much more reference to intuition or gut feellsquo as they often

phrased it than less experienced traders However again there were important differences

between low and high paid traders in the high experience group Low paid traders who talked

about the use of intuition often talked of it in terms of a rather mysterious process You either had

a feeling or not For example

ldquoIt‟s almost like a sixth sense Something comes over you and you feel like - yes I

know they‟re going to be looking to buy these later on or looking to sell these later

onrdquo 116 high experience low pay

By contrast the top paid group tended to reflect critically about the origins of their

intuitions and to bring them together with more objective information -

ldquoIf I do fancy a stock - you have a feeling it feels right it has done nothing for like

two or three months and you‟ve seen sellers and they start to dwindle and it is just

stagnant and then you have a look on the charts you refer to the technical side as

well as the emotional side of the trade So you know a combination of technical and

23

emotional as well as what the analyst thinks as well so you sort of bring the

instruments you have available to you to make the decision rather than the snap

[snaps his finger] I fancy buying thatrdquo 101 high experience high pay

ldquoI may examine opportunities based on intuition that something is going to happen

but the decision is based on something I think is rationalrdquo 68 medium experience

high pay

Reported use of intuition does seem to increase with trader experience However traderslsquo

engagement with their feelings is qualitatively different between low and high performers High

performing traders seem to engage with their intuitions at a meta-cognitive level and make

judgments about the relevance of these feelings to the decision at hand This is consistent with

the growing literature on expertise which points to experience as a necessary but insufficient

condition for the development of expertise and points to the role of extended critical engagement

with practice in developing expertise (Ericsson 2006 Ericsson Krampe amp Tesch-Roemer

1993)

Traders were not universally positive about the role of intuition in market decision making

Some believed reliance on such feelings yields poor outcomes -

ldquoMany traders feel that models have been developed by academics who do not know

markets and [traders] think that gut feeling is more important My experience is that

this is 100 wrong and computers can make better decisions than tradersrdquo 37

medium experience medium pay

Overall however the data support a picture of expert traders having a meta-cognitive

engagement with emotion regulation This process entails discrimination between emotions in

terms of their relevance to the decision at hand and effective strategies for emotion regulation to

enhance performance

24

Empathy

The third identified theme was empathy monitoring own emotions as information

about what other market players might be feeling Only five traders explicitly described

using their own capacity for empathy as a decision making tool Although not frequent in

our data these examples are important illustrating that there is a path for traders beyond

simply seeking to eliminate or reduce the intensity of their emotions These traders

fostered feelings as a source of information about other market actors which they managed

and used in a self-aware analysis One trader described using his own fear as an indicator

of fear in the market Another described actively imagining the feelings of other market

actors ―trying to put myself in [the Bank of England Governorlsquos] feet to develop a feel for

how he feels and thinks 14 high experience high pay

Three traders talked about an emotional affinity with the feelings of people in

national markets (Spain 34 high experience medium pay Italy 70 medium experience

low pay and Japan 117 high experience medium pay) with whom they shared a common

culture and propensity to react emotionally in similar ways to the same market events This

group was small but these data broaden the picture of traders reasoning with emotionlsquo

and offer a potentially rich and fruitful avenue for future research

DISCUSSION AND CONCLUSIONS

To ask whether emotion disturbs or aids traderslsquo decision-making is to ask the wrong

question Traderslsquo emotions and cognition are inextricably linked Therefore a more productive

question to ask in this context is whether there are more or less effective strategies for managing

and using emotion in financial decision-making This has been the thrust of our analysis which

25

sought to move beyond previous work that simply characterizes emotional arousal as detrimental

to performance (eg Lo et al 2005 Schunk and Bersh 2006) The study contributes to our

understanding of the role of emotions in work and decision-making in several distinct ways In

contributing to our understanding of the role of emotion at work this study has particular

relevance in that it considers a work domain which has been theorized as strongly normatively

rational as opposed to a work domain (such as negotiation or customer service) where

performance is primarily dependent on effective social interaction However it is clear from this

study that even within such an analysis-intensive domain as financial trading emotion plays a

central role Traders and their managers are frequently preoccupied with the effective regulation

and use of emotions in their work Our work points to the value of a more nuanced understanding

which considers the role of emotions in decision-making the differential impact of various

emotion regulation strategies the conditions under which gut-feellsquo may support effective

decision-making and the role of empathic responses in understanding the behavior of other

market actors

Effective emotion regulation seems to be a critical success factor in trading for our

findings suggest that the strategies for emotion regulation adopted by expert higher performing

traders are qualitatively different from those of lower performing traders In particular higher

performers are more inclined to regulate emotions through attentional deployment and cognitive

change and may display a willingness to cope with negative feelings in the interests of

maintaining objectivity and pursuing longer term goals The kind of attention and appraisal-

focused emotion regulation strategies used by high-performing traders do not seem to be too

cognitively expensive and are effective in reducing negative experience of emotion (Gross

2002) By contrast less expert traders engage either in avoidant behaviors such as walking

away from the desk or invest significant cognitive effort in modulating their emotional

26

responses This extends previous findings (eg Grandey 2003) concerning the performance

benefits of antecedent versus response-focused emotion regulation in the context of emotion

labor to the very different context of financial decision-making Our findings also suggest that

willingness to endure negative feelings in pursuit of long-term goals may be more adaptive than

purely defensive strategies aimed at maintaining positive feelings (Labouvie-Vief 2003 Tamir

2005)

This study also provides evidence that more effective emotion regulation strategies can be

learned in a financial decision-making context While an individuallsquos preferred approach to

emotion regulation is likely to be influenced by personality traits neuroticism and extroversion in

particular (Gross amp John 2003) our interviews with traders and their managers also point to the

importance of traderslsquo learned strategies for emotion regulation Importantly our study also

suggests that defensive emotion regulation strategies may be problematic because they reduce

opportunities to exercise expert intuition

These findings go well beyond prior research on emotion regulation and performance

(eg Grandey 2003) which has a primary focus on performance in the context of interpersonal

interaction Our findings uniquely address the performance of professional traders for whom

performance is not primarily dependent on interpersonal interaction and which has been

theorized as strongly rational involving the selection of optimal strategies in the face of complex

cognitive demands and requiring attention to a large volume of information with uncertain

relevance

Turning to intuition traders in our study mirror the balance of opinion in the research

literature on intuition They are equivocal about whether feelings and hunches about appropriate

courses of action lead to better or worse outcomes than purely rational analysis There were

strong feelings on both sides with traders being quite evenly divided between the two camps

27

However again our study suggests the importance of a more nuanced approach than simply

asking whether reliance on intuition is good or bad and points towards the conditions in which

reliance on intuitive judgment may be more and less effective The findings suggest that one

characteristic of higher performing traders may be a greater willingness to reflect critically about

their intuitions and feelings about trading These traders often reported relying on intuition but

they tend to weigh their feelings critically alongside other evidence and to reflect about the

provenance of those feelings Lower performing traders may rely on feelings alone and show

less propensity to think critically about the source of hunches This reflection by expert traders

about the provenance of feelings may be particularly salient given Schwarz and Clorelsquos (1983

2003) finding that the impact of emotions on behavior is reduced or disappears when the

relevance of those emotions is explicitly called into question

That traderslsquo reliance on affective cues in decision-making can support effective

performance is consistent with Damasiolsquos observation that deciding advantageously depends on

the use of affective cues in both learning and deciding (Bechara et al 1997 Damasio 1994)

There is increasing evidence that humans are naturally proficient in the ability to acquire

expertise and that encapsulation of experience in expert intuition and perception via system one

provides a means of by-passing cognitive limits (Ericsson 2006) The nature of expertise could

counteract the inherent environmental uncertainties that Tiedens and Linton (2001) identified as

leading to more conscious appraisal of information While not an unequivocal result our finding

of greater critical engagement among higher performing traders with intuitions and their more

sophisticated deployment of intuition in combination with analysis suggests an important

direction for future research

The small number of accounts of traders monitoring their own emotions as a source of

information about the emotions of other market actors was intriguing These data suggest a

28

possibly productive avenue for future research We do not have evidence of performance

outcomes of predictive uses of empathy in this manner but our findings are consistent with

arguments that the evolution of the human brain has been significantly driven by the need to

predict the behavior of other humans often via subtle cues (eg Nicholson 2000)

We suggest that the identification of links between decision-making performance and

emotion regulation in this study has important implications for theory development in two key

fields First while somewhat tacit in much of the literature the implication of many claims in the

decision-making and behavioral finance literatures is that a range of key decision-making biases

are underpinned by mechanisms which involve emotion processes One relevant explicit example

is Thalerlsquos (1985 1999) account of the role of hedonic editinglsquo in mental accounting and the

disposition effect (the tendency to hold losing assets longer than winning assets) This explains

key biases in terms of the desire to maintain positive hedonic tone There is evidence too of

interpersonal variation in propensity to exhibit such biases for example investors vary in their

propensity to exhibit the disposition effect (Shapira amp Venezia 2001 Weber amp Welfens 2008)

In this study we have seen that traders seek to regulate emotions in order to avoid decision biases

and that higher performing traders typically exhibit more sophisticated emotion regulation

strategies This suggests that it would be productive to investigate the role of emotion regulation

as one key source of interpersonal variation in susceptibility to a range of decision biases

A second implication concerns the role of emotion in expert performance While much

attention has been paid to the nature of cognition in expert performance the expertise literature

hardly considers the role of emotion For example examining the index of the Cambridge

Handbook of Expertise and Expert Performance (Ericsson et al 2006) reveals very few

references to emotion and these are peripheral to the main arguments of the chapters which

contain them Our research suggests first that effective emotion regulation may be an important

29

facet of expert performance and second that greater attention should be paid to the interactions

between emotion emotion regulation and expert intuition Further research could test the

proposition that effective expert intuition is reduced by reliance on defensive emotion regulation

strategies

While our study points to the importance of intuition in traderslsquo work it may be that the

relative importance of intuition and analysis vary with task characteristics such as time span of

decision-making Certainly this seemed to be the view of several senior managers with

responsibility for allocating traders to trading roles The interplay that expert traders described

between intuition and analysis is also intriguing The importance of context to the role of affect

in decision-making has been noted in prior research (Forgas amp George 2001) Further research

could usefully explore this aspect of traderslsquo expertise

This study also contains some potentially important implications for practice First it

points to the importance of learned strategies for emotion regulation and the need for effective

support for their development Second our data directly and indirectly point to the key role of

management in this process Our findings suggest that there may be considerable benefits to

skilled managerial interventions that help to steer effective emotion regulation and support

inexperienced traders in developing emotion regulation skills Additionally managers may be

able to help traders to understand the productive role that critically engaged experience-based

intuition may play in decision-making Our evidence suggests that many high performing traders

deploy a reflective and critical approach to the use and development of intuition well-founded in

experience Managers could help to guide this process through coaching The contextual

dependence of high quality intuitions suggests they are quite domain specific and may not

transfer across contexts As several informants told us this is especially true for traders operating

under different market conditions

30

We heard repeated concerns from senior managers who worried about traders who had

not seen a bear market and would not operate well when that occurred We also heard many

stories of people transferring between trading areas and needing time to re-contextualize

expertise before their intuitions could be considered reliable Thus managers have a role in

helping traders to extend the boundaries of their expertise Given recent events in financial

markets our findings may be relevant to an understanding of how traders react under massively

changed trading conditions and how those reactions might either contribute to or result from

market volatility

This research has some important limitations First although we have argued for the

importance of an account of emotion that includes the experience of emotion as Pham (2004

368) notes the affective system is focused on the present Thus people can be poor at recalling or

predicting emotions There are limits to the human capacity to introspect on emotion processes

and to recall the experience of emotion These limits are also subject to wide individual

differences The capacity for introspection and recall will also vary between individuals For this

reason studies such as ours need to be complemented with more physiologically based research

as well as further qualitative and quantitative studies

Second as in all work contexts traders subscribe to norms of socially sanctioned

behavior and to common narratives about the nature of their work We have not treated emotional

labor as a primary component of traderslsquo work and performance The majority of work

interactions are carried out through highly abbreviated electronic exchanges which provide a poor

medium for the communication of emotion However there is a sense in which traders engage in

emotional labor since especially for novices there are social pressures to comply with display

rules which emphasize the avoidance of displays of strong emotion One common narrative

thread that ran though many traderslsquo accounts of their work was a representation of trading work

31

as principally concerned with rational analysis from which emotions are a dangerous distraction

This narrative seemed particularly strong in the accounts of less experienced traders Although as

we have seen the mask would often slip as they discussed their work Some traderslsquo accounts

were clearly colored by a desire to conform to this mode of self-presentation In consequence it is

possible that in our interviews and during data analysis we were at times unable to distinguish

effectively between defensive denial of emotion and effective regulation of emotion This would

be another avenue for future research

To conclude we know that emotions are a rich source of experience in everyday life but

at the same time in work contexts they can be a source of vulnerability a wayward influence over

judgment and a source of disturbance to process The more ―rational-economic such

environments are the more likely we are to hold such beliefs (Nicholson 2000) Our research

illustrates that this position is false or at best short-sighted In the hyper-rational world of

trading in financial markets we did find some evidence that emotions disturbed performance but

mostly among the inexperienced and un-reflective traders The best traders are able to regulate

emotions effectively and incorporate relevant emotions as information ndash signals or a kind of

radar that contain information about risks what is going on in the minds of others and the weight

and relevance to be accorded to onelsquos own past experience

32

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Bargh J A Chen M amp Burrows L (1996) Automaticity of social behavior Direct effects of

trait construct and stereotype activation on action Journal of Personality and Social

Psychology 71 230-244

Baumeister R F Bratslavsky E Muraven M amp Tice D M (1998) Ego depletion Is the

active self a limited resource Journal of Personality and Social Psychology 74 1252-

1265

Bechara A Damasio A Tranel D amp Damasio A R (1997) Deciding advantageously before

knowing the advantageous strategy Science 275 1293-1295

Bower G H (1981) Mood and memory American Psychologist 36 129 ndash 148

Bower G H (1991) Mood congruity of social judgments In J P Forgas (Ed) Emotion and

social judgments (pp 31ndash53) Oxford Pergamon Press

Braun V amp Clarke V (2006) Using thematic analysis in psychology Qualitative Research in

Psychology 3(2) 77-101

Buck R (1999) The biological affects a typology Psychological Reveiw 106 301-336

Damasio A R (1994) Descartes‟ error Emotion reason and the human brain New York

Putnam

Dane E amp Pratt M G (2007) Exploring intuition and its role in managerial decision making

The Academy of Management Review 32 33-54

De Bondt W Palm F amp Wolff C (2004) Introduction to the special issue on behavioral

finance Journal of Empirical Finance 11 423-427

Dreyfus H amp Dreyfus S (2005) Expertise in real world contexts Organization Studies 26

779-792

Epstein S Pacini R Denes-Raj V amp Heier H (1996) Individual differences in intuitive-

experiential and analytical-rational thinking styles Journal of Personality and Social

Psychology 71 390-405

Ericsson K A Krampe R T amp Tesch-Roemer C (1993) The role of deliberate practice in the

acquisition of expert performance Psychological Review 100 363-406

Ericsson K A (2006) An introduction to the Cambridge Handbook of Expertise and Expert

Performance its development organization and content In K A Ericsson amp N Charness

amp P J Feltovich amp R R Hoffman (Eds) The Cambridge Handbook of Expertise and

Expert Performance 1st ed 3-20 Cambridge Cambridge University Press

Fama E F (1991) Efficient Capital Markets II The Journal of Finance 46 1575-1617

Fama E F (1998) Market efficiency long-term returns and behavioral finance Journal of

Financial Economics Vol 49 283-306

Fenton-OCreevy M Nicholson N Soane E amp Willman P (2005) Traders Risks Decisions

and Management in Financial Markets Oxford Oxford University Press

Finucane M L Alhakami A Slovic P amp Johnson S M (2000) The affect heuristic in

judgments of risks and benefits Journal of Behavioral Decision Making 13(1) 1-17

Forgas JP amp George JM (2001) Affective influences on judgments and behavior in

organizations An information processing perspective Organizational Behavior and

Human Decision Processes 86(1) 3-34

Grandey AA (2000) Emotion Regulation in the Workplace A new way to conceptualize

Emotional Labor Journal of Occupational Health Psychology 5(1) 95-110

33

Grandey A A (2003) When the show must go on surface acting and deep acting as

determinants of emotional exhaustion and peer-rated service delivery Academy of

Management Journal 46 86-96

Gray JA (1999) Cognition emotion conscious experience and the brain In T Dalgleish and

MJ Power (Eds) Handbook of Cognition and Emotion (pp83-102) Chichester England

Wiley

Gross J (2002) Emotion regulation affective cognitive and social consequences

Psychophysiology 39 281

Gross J J amp John O P (2003) Individual differences in two emotion regulation processes

Implications for affect relationships and well-being Journal of Personality and Social

Psychology 85(2) 348-362

Gross J J amp Thompson R A (2007) Emotion regulation Conceptual foundations In J J

Gross (Ed) Handbook of emotion regulation New York NY Guilford Press

Isen A M Shalker T E Clark M amp Karp L (1978) Affect accessibility of material in

memory and behavior A cognitive loop Journal of Personality and Social Psychology

36 1-12

Johnson E amp Tversky A (1983) Affect generalization and the perception of risk Journal of

Personality and Social Psychology 45(1) 20-31

Kavanaugh D amp Bower G (1985) Mood and self-efficacy Impact of job and sadness on

perceived capabilities Cognitive Therapy and Research 9 507-525

Klein G A Calderwood R amp Clinton Cirocco A (1986) Rapid decision-making on the

fireground Human Factors and Ergonomics Society 30th Annual Meeting Vol 1 576-

580

Knorr-Cetina K amp Brugger U (2002) Traders Engagement with Markets A Postsocial

Relationship Theory Culture and Society 19(5-6) 161-185

Labouvie-Vief G (2003) Dynamic integration Affect cognition and the self in adulthood

Current Directions in Psychological Science 12 201-206

Lerner J S amp Keltner D (2001) Fear anger and risk Journal of Personality and Social

Psychology 81(1) 146-159

Lerner J S Small D A amp Loewenstein G (2004) Heart strings and purse strings Carryover

effects of emotions on economic decisions Psychological Science 15(5) 337-341

Lo A Repin D amp Steenbarger B (2005) Fear and greed in financial markets A clinical study

of day traders American Economic Review 95 352-359

Lo A W amp Repin D V (2002) The Psychophysiology of Real-Time Financial Risk

Processing Journal of Cognitive Neuroscience 14 323-339

MacKenzie D (2006) An Engine Not A Camera How Financial Models Shape Markets

Cambridge Mass MIT Press

Mayer JD amp Hanson A (1995) Mood-congruent judgment over time Personality and Social

Psychology Bulletin 21 237-244

Mayer JD DiPaolo M and Salovey P (1990) Perceiving affective content in ambiguous

visual stimuli a component of emotional intelligence Journal of Personality Assessment

54 772-781

Miller G (2003) The cognitive revolution a historical perspective Trends in Cognitive Science

7 141

Muraven M amp Baumeister R F (2000) Self-regulation and depletion of limited resources

Does self-control resemble a muscle Psychological Bulletin 126 247-259

Nicholson N (2000) Managing the Human Animal London ThomsonTexere

34

Peterson R L (2007) Affect and financial decision-making How neuroscience can inform

market participants The Journal of Behavioral Finance 8(2) 70-78

Pham M T (2004) The logic of feeling Journal of Consumer Psychology 14 360-369

Phelps E A (2006) Emotion and cognition Insights from studies of the human amygdala

Annual Review of Psychology 57 27-53

Sayer A (1997) Essentialism social constructionism and beyond The Sociological Review 45

453-487

Shapira Z amp Venezia I (2001) Patterns of behavior of professionally managed and

independent investors Journal of Banking and Finance 25 1573ndash1587

Schunk D amp Betsch C (2006) Explaining the heterogeneity in utility functions by individual

differences in decision modes Journal of Economic Psychology 27 386-401

Schwager J D (1993) Market Wizards Interviews with Top Traders New York Collins

Schwarz N amp Clore G L (1983) Mood misattribution and judgments of well-being

Informative and directive functions of affective states Journal of Personality and Social

Psychology 45 513-523

Seo M G Barrett L F amp Bartunek J M (2004) The role of affective experience in work

motivation Academy of Management Review 29 423-439

Seo M G amp Barrett L F (2007) Being emotional during decision makingmdashgood or bad An

empirical investigation The Academy of Management Journal 50 923-940

Shefrin H (2000) Beyond Greed and Fear Understanding Behavioral Finance and the

Psychology of Investing Boston MA Harvard Business School Press

Stokes A F Kemper K amp Kite K (1997) Aeronautical decision making cue recognition and

expertise under time pressure In C E Zsambok amp G Klein (Eds) Naturalistic Decision

Making pp 183-196 Mahwah NJ Erlbaum

Tamir M (2005) Dont worry be happy Neuroticism trait-consistent affect regulation

and performance Journal of Personality and Social Psychology 89 (3) 449 ndash

461

Thaler R H (1985) Mental accounting and consumer choice Marketing Science 4(3) 199-214

Thaler R H (1993) Advances In Behavioral Finance New York Russel Sage Foundation

Thaler R H (1999) Mental accounting matters Journal of Behavioral Decision Making 12(3)

183-206

Tiedens L amp Linton S (2001) Judgment under emotional certainty and uncertainty the effects

of specific emotions on information processing Journal of Personality and Social

Psychology 81(6) 973-988

Todd P M amp Gigerenzer G (2007) Environments that make us smart Ecological rationality

Current Directions in Psychological Science 16 167-171

Totterdell P Briner R B Parkinson B amp Reynolds S (1996) Fingerprinting time series

dynamic patterns in self-report and performance measures uncovered by a graphical non-

linear method British Journal of Psychology 87(1) 43-60

Weber M amp Welfens F (2008) Splitting the Disposition Effect Asymmetric Reactions

Towards bdquoSelling winners‟ and bdquoHolding Losers‟ Working Paper University of

Mannheim

Wright WF amp Bower GH (1992) Mood effects on subjective probability assessment

Organizational Behavior and Human Decision Processes 52 276ndash91

20

going to be gun shy and lose your confidence We want you to know that we like you

and if you think you‟ve got to buy them buy them and if you‟ve got to sell them sell

them but whatever you do don‟t stop trading‟ So that was a huge relief Since then I

don‟t get too depressed about losing money although there are always good days

and bad daysrdquo 25 low experience medium performance

Other managers clearly gave thought to the relative strengths and weaknesses of more

intuitive versus more analytical traders in their decisions about matching traders to roles -

ldquoA gut trader should trade a liquid market - he might change his feel so he needs to

get out The analytical trader who thinks much more about what he‟s doing will

change their mind less often and trade with a different time frame A gut trader can

be bullish in the morning The analytical trader will look at something for a week

and then put on a position - less important to get in and out He doesn‟t need to be in

a liquid market - in an emerging market you need a more analytical traderrdquo 122

Manager

ldquoDerivatives are very quantitative and people think if you have a PhD you will be

very good because you have an understanding of options theory but this is not

always the case and you tend to overlook things Although you can put the

parameters into the model there are still a lot of things which are uncertain

Sometimes adding a more qualitative feel to it ndashbdquoyes that‟s what the model says but

the risk doesn‟t look right‟ hellip I tend to have a mixture of people on the desk - those

who are more quantitative and those who are more common sense or gut instinct

traders Having the blend is quite useful for bouncing ideasrdquo 124 Manager

These reflections have implications for management strategies in trading environments or

indeed any others where the main role of the operative is complex decision-making under

21

constraints of time and uncertain and incomplete information We consider these points further in

our discussion

Emotional Cues and the Use of Intuition

The second broad theme concerned the role of emotional cues in traderslsquo decision-

making Many of the traders discussed this aspect of emotion as intuition Traderslsquo own accounts

and conceptualizations of intuition fit well with Dane and Prattlsquos (200740) definition of intuition

as ―affectively charged judgments that arise through rapid non-conscious and holistic

associations For example -

ldquo[W]ithout a doubt some of the best bargains are the ones you dont do You know

theyre bad bargains You know It‟s a gut feel Youve looked at the playing field and

you just know this is a bad bargainrdquo 106 high experience moderate pay

Some of the traders see a more subtle and sophisticated role for emotions which represent

an unconscious drawing on experience -

ldquoI think many people do say theyre gut-feel traders but perhaps theyre not analyzing

what theyre actually thinking and theyre seeing a lot of customer flow and a lot of

buyers and they probably dont necessarily realize the reasons why they want to buy

But there are very good traders that say theyre trading off gut feel that I believe

actually have probably reasonable information reasonable thoughts behind it but

they wouldnt literally toss a coinrdquo 55 high experience high pay

Feelings are also seen as a kind of radar directing attention and shaping perceptions

around opportunities to enable them to be promptly seized

ldquoI think what a trader has to have is not necessarily this gut feeling but this nose for

opportunities If an opportunity comes along you have to be able to spot it and see it

22

and sometimes people you typically find in this business - an opportunity is there and

they cant see it and then its taken by someone else and its like oh yeah that was a

good idea but it is gonerdquo 58 high experience low pay

Not only do feelings act as a kind of radar directing attention but they do so in a way that

enables rapid decision making under time pressure As one trader noted -

ldquoTrading includes stuff which is beyond trading Trading is when you make decisions

involving financial risk that have two qualities you have to make them in someone

else‟s time schedule not your own and when you make a decision you have to be

confident when you have incomplete or imperfect information and therefore there

must be some kind of intuitive or qualitative elementrdquo 121 high experience high pay

Experienced traders made much more reference to intuition or gut feellsquo as they often

phrased it than less experienced traders However again there were important differences

between low and high paid traders in the high experience group Low paid traders who talked

about the use of intuition often talked of it in terms of a rather mysterious process You either had

a feeling or not For example

ldquoIt‟s almost like a sixth sense Something comes over you and you feel like - yes I

know they‟re going to be looking to buy these later on or looking to sell these later

onrdquo 116 high experience low pay

By contrast the top paid group tended to reflect critically about the origins of their

intuitions and to bring them together with more objective information -

ldquoIf I do fancy a stock - you have a feeling it feels right it has done nothing for like

two or three months and you‟ve seen sellers and they start to dwindle and it is just

stagnant and then you have a look on the charts you refer to the technical side as

well as the emotional side of the trade So you know a combination of technical and

23

emotional as well as what the analyst thinks as well so you sort of bring the

instruments you have available to you to make the decision rather than the snap

[snaps his finger] I fancy buying thatrdquo 101 high experience high pay

ldquoI may examine opportunities based on intuition that something is going to happen

but the decision is based on something I think is rationalrdquo 68 medium experience

high pay

Reported use of intuition does seem to increase with trader experience However traderslsquo

engagement with their feelings is qualitatively different between low and high performers High

performing traders seem to engage with their intuitions at a meta-cognitive level and make

judgments about the relevance of these feelings to the decision at hand This is consistent with

the growing literature on expertise which points to experience as a necessary but insufficient

condition for the development of expertise and points to the role of extended critical engagement

with practice in developing expertise (Ericsson 2006 Ericsson Krampe amp Tesch-Roemer

1993)

Traders were not universally positive about the role of intuition in market decision making

Some believed reliance on such feelings yields poor outcomes -

ldquoMany traders feel that models have been developed by academics who do not know

markets and [traders] think that gut feeling is more important My experience is that

this is 100 wrong and computers can make better decisions than tradersrdquo 37

medium experience medium pay

Overall however the data support a picture of expert traders having a meta-cognitive

engagement with emotion regulation This process entails discrimination between emotions in

terms of their relevance to the decision at hand and effective strategies for emotion regulation to

enhance performance

24

Empathy

The third identified theme was empathy monitoring own emotions as information

about what other market players might be feeling Only five traders explicitly described

using their own capacity for empathy as a decision making tool Although not frequent in

our data these examples are important illustrating that there is a path for traders beyond

simply seeking to eliminate or reduce the intensity of their emotions These traders

fostered feelings as a source of information about other market actors which they managed

and used in a self-aware analysis One trader described using his own fear as an indicator

of fear in the market Another described actively imagining the feelings of other market

actors ―trying to put myself in [the Bank of England Governorlsquos] feet to develop a feel for

how he feels and thinks 14 high experience high pay

Three traders talked about an emotional affinity with the feelings of people in

national markets (Spain 34 high experience medium pay Italy 70 medium experience

low pay and Japan 117 high experience medium pay) with whom they shared a common

culture and propensity to react emotionally in similar ways to the same market events This

group was small but these data broaden the picture of traders reasoning with emotionlsquo

and offer a potentially rich and fruitful avenue for future research

DISCUSSION AND CONCLUSIONS

To ask whether emotion disturbs or aids traderslsquo decision-making is to ask the wrong

question Traderslsquo emotions and cognition are inextricably linked Therefore a more productive

question to ask in this context is whether there are more or less effective strategies for managing

and using emotion in financial decision-making This has been the thrust of our analysis which

25

sought to move beyond previous work that simply characterizes emotional arousal as detrimental

to performance (eg Lo et al 2005 Schunk and Bersh 2006) The study contributes to our

understanding of the role of emotions in work and decision-making in several distinct ways In

contributing to our understanding of the role of emotion at work this study has particular

relevance in that it considers a work domain which has been theorized as strongly normatively

rational as opposed to a work domain (such as negotiation or customer service) where

performance is primarily dependent on effective social interaction However it is clear from this

study that even within such an analysis-intensive domain as financial trading emotion plays a

central role Traders and their managers are frequently preoccupied with the effective regulation

and use of emotions in their work Our work points to the value of a more nuanced understanding

which considers the role of emotions in decision-making the differential impact of various

emotion regulation strategies the conditions under which gut-feellsquo may support effective

decision-making and the role of empathic responses in understanding the behavior of other

market actors

Effective emotion regulation seems to be a critical success factor in trading for our

findings suggest that the strategies for emotion regulation adopted by expert higher performing

traders are qualitatively different from those of lower performing traders In particular higher

performers are more inclined to regulate emotions through attentional deployment and cognitive

change and may display a willingness to cope with negative feelings in the interests of

maintaining objectivity and pursuing longer term goals The kind of attention and appraisal-

focused emotion regulation strategies used by high-performing traders do not seem to be too

cognitively expensive and are effective in reducing negative experience of emotion (Gross

2002) By contrast less expert traders engage either in avoidant behaviors such as walking

away from the desk or invest significant cognitive effort in modulating their emotional

26

responses This extends previous findings (eg Grandey 2003) concerning the performance

benefits of antecedent versus response-focused emotion regulation in the context of emotion

labor to the very different context of financial decision-making Our findings also suggest that

willingness to endure negative feelings in pursuit of long-term goals may be more adaptive than

purely defensive strategies aimed at maintaining positive feelings (Labouvie-Vief 2003 Tamir

2005)

This study also provides evidence that more effective emotion regulation strategies can be

learned in a financial decision-making context While an individuallsquos preferred approach to

emotion regulation is likely to be influenced by personality traits neuroticism and extroversion in

particular (Gross amp John 2003) our interviews with traders and their managers also point to the

importance of traderslsquo learned strategies for emotion regulation Importantly our study also

suggests that defensive emotion regulation strategies may be problematic because they reduce

opportunities to exercise expert intuition

These findings go well beyond prior research on emotion regulation and performance

(eg Grandey 2003) which has a primary focus on performance in the context of interpersonal

interaction Our findings uniquely address the performance of professional traders for whom

performance is not primarily dependent on interpersonal interaction and which has been

theorized as strongly rational involving the selection of optimal strategies in the face of complex

cognitive demands and requiring attention to a large volume of information with uncertain

relevance

Turning to intuition traders in our study mirror the balance of opinion in the research

literature on intuition They are equivocal about whether feelings and hunches about appropriate

courses of action lead to better or worse outcomes than purely rational analysis There were

strong feelings on both sides with traders being quite evenly divided between the two camps

27

However again our study suggests the importance of a more nuanced approach than simply

asking whether reliance on intuition is good or bad and points towards the conditions in which

reliance on intuitive judgment may be more and less effective The findings suggest that one

characteristic of higher performing traders may be a greater willingness to reflect critically about

their intuitions and feelings about trading These traders often reported relying on intuition but

they tend to weigh their feelings critically alongside other evidence and to reflect about the

provenance of those feelings Lower performing traders may rely on feelings alone and show

less propensity to think critically about the source of hunches This reflection by expert traders

about the provenance of feelings may be particularly salient given Schwarz and Clorelsquos (1983

2003) finding that the impact of emotions on behavior is reduced or disappears when the

relevance of those emotions is explicitly called into question

That traderslsquo reliance on affective cues in decision-making can support effective

performance is consistent with Damasiolsquos observation that deciding advantageously depends on

the use of affective cues in both learning and deciding (Bechara et al 1997 Damasio 1994)

There is increasing evidence that humans are naturally proficient in the ability to acquire

expertise and that encapsulation of experience in expert intuition and perception via system one

provides a means of by-passing cognitive limits (Ericsson 2006) The nature of expertise could

counteract the inherent environmental uncertainties that Tiedens and Linton (2001) identified as

leading to more conscious appraisal of information While not an unequivocal result our finding

of greater critical engagement among higher performing traders with intuitions and their more

sophisticated deployment of intuition in combination with analysis suggests an important

direction for future research

The small number of accounts of traders monitoring their own emotions as a source of

information about the emotions of other market actors was intriguing These data suggest a

28

possibly productive avenue for future research We do not have evidence of performance

outcomes of predictive uses of empathy in this manner but our findings are consistent with

arguments that the evolution of the human brain has been significantly driven by the need to

predict the behavior of other humans often via subtle cues (eg Nicholson 2000)

We suggest that the identification of links between decision-making performance and

emotion regulation in this study has important implications for theory development in two key

fields First while somewhat tacit in much of the literature the implication of many claims in the

decision-making and behavioral finance literatures is that a range of key decision-making biases

are underpinned by mechanisms which involve emotion processes One relevant explicit example

is Thalerlsquos (1985 1999) account of the role of hedonic editinglsquo in mental accounting and the

disposition effect (the tendency to hold losing assets longer than winning assets) This explains

key biases in terms of the desire to maintain positive hedonic tone There is evidence too of

interpersonal variation in propensity to exhibit such biases for example investors vary in their

propensity to exhibit the disposition effect (Shapira amp Venezia 2001 Weber amp Welfens 2008)

In this study we have seen that traders seek to regulate emotions in order to avoid decision biases

and that higher performing traders typically exhibit more sophisticated emotion regulation

strategies This suggests that it would be productive to investigate the role of emotion regulation

as one key source of interpersonal variation in susceptibility to a range of decision biases

A second implication concerns the role of emotion in expert performance While much

attention has been paid to the nature of cognition in expert performance the expertise literature

hardly considers the role of emotion For example examining the index of the Cambridge

Handbook of Expertise and Expert Performance (Ericsson et al 2006) reveals very few

references to emotion and these are peripheral to the main arguments of the chapters which

contain them Our research suggests first that effective emotion regulation may be an important

29

facet of expert performance and second that greater attention should be paid to the interactions

between emotion emotion regulation and expert intuition Further research could test the

proposition that effective expert intuition is reduced by reliance on defensive emotion regulation

strategies

While our study points to the importance of intuition in traderslsquo work it may be that the

relative importance of intuition and analysis vary with task characteristics such as time span of

decision-making Certainly this seemed to be the view of several senior managers with

responsibility for allocating traders to trading roles The interplay that expert traders described

between intuition and analysis is also intriguing The importance of context to the role of affect

in decision-making has been noted in prior research (Forgas amp George 2001) Further research

could usefully explore this aspect of traderslsquo expertise

This study also contains some potentially important implications for practice First it

points to the importance of learned strategies for emotion regulation and the need for effective

support for their development Second our data directly and indirectly point to the key role of

management in this process Our findings suggest that there may be considerable benefits to

skilled managerial interventions that help to steer effective emotion regulation and support

inexperienced traders in developing emotion regulation skills Additionally managers may be

able to help traders to understand the productive role that critically engaged experience-based

intuition may play in decision-making Our evidence suggests that many high performing traders

deploy a reflective and critical approach to the use and development of intuition well-founded in

experience Managers could help to guide this process through coaching The contextual

dependence of high quality intuitions suggests they are quite domain specific and may not

transfer across contexts As several informants told us this is especially true for traders operating

under different market conditions

30

We heard repeated concerns from senior managers who worried about traders who had

not seen a bear market and would not operate well when that occurred We also heard many

stories of people transferring between trading areas and needing time to re-contextualize

expertise before their intuitions could be considered reliable Thus managers have a role in

helping traders to extend the boundaries of their expertise Given recent events in financial

markets our findings may be relevant to an understanding of how traders react under massively

changed trading conditions and how those reactions might either contribute to or result from

market volatility

This research has some important limitations First although we have argued for the

importance of an account of emotion that includes the experience of emotion as Pham (2004

368) notes the affective system is focused on the present Thus people can be poor at recalling or

predicting emotions There are limits to the human capacity to introspect on emotion processes

and to recall the experience of emotion These limits are also subject to wide individual

differences The capacity for introspection and recall will also vary between individuals For this

reason studies such as ours need to be complemented with more physiologically based research

as well as further qualitative and quantitative studies

Second as in all work contexts traders subscribe to norms of socially sanctioned

behavior and to common narratives about the nature of their work We have not treated emotional

labor as a primary component of traderslsquo work and performance The majority of work

interactions are carried out through highly abbreviated electronic exchanges which provide a poor

medium for the communication of emotion However there is a sense in which traders engage in

emotional labor since especially for novices there are social pressures to comply with display

rules which emphasize the avoidance of displays of strong emotion One common narrative

thread that ran though many traderslsquo accounts of their work was a representation of trading work

31

as principally concerned with rational analysis from which emotions are a dangerous distraction

This narrative seemed particularly strong in the accounts of less experienced traders Although as

we have seen the mask would often slip as they discussed their work Some traderslsquo accounts

were clearly colored by a desire to conform to this mode of self-presentation In consequence it is

possible that in our interviews and during data analysis we were at times unable to distinguish

effectively between defensive denial of emotion and effective regulation of emotion This would

be another avenue for future research

To conclude we know that emotions are a rich source of experience in everyday life but

at the same time in work contexts they can be a source of vulnerability a wayward influence over

judgment and a source of disturbance to process The more ―rational-economic such

environments are the more likely we are to hold such beliefs (Nicholson 2000) Our research

illustrates that this position is false or at best short-sighted In the hyper-rational world of

trading in financial markets we did find some evidence that emotions disturbed performance but

mostly among the inexperienced and un-reflective traders The best traders are able to regulate

emotions effectively and incorporate relevant emotions as information ndash signals or a kind of

radar that contain information about risks what is going on in the minds of others and the weight

and relevance to be accorded to onelsquos own past experience

32

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trait construct and stereotype activation on action Journal of Personality and Social

Psychology 71 230-244

Baumeister R F Bratslavsky E Muraven M amp Tice D M (1998) Ego depletion Is the

active self a limited resource Journal of Personality and Social Psychology 74 1252-

1265

Bechara A Damasio A Tranel D amp Damasio A R (1997) Deciding advantageously before

knowing the advantageous strategy Science 275 1293-1295

Bower G H (1981) Mood and memory American Psychologist 36 129 ndash 148

Bower G H (1991) Mood congruity of social judgments In J P Forgas (Ed) Emotion and

social judgments (pp 31ndash53) Oxford Pergamon Press

Braun V amp Clarke V (2006) Using thematic analysis in psychology Qualitative Research in

Psychology 3(2) 77-101

Buck R (1999) The biological affects a typology Psychological Reveiw 106 301-336

Damasio A R (1994) Descartes‟ error Emotion reason and the human brain New York

Putnam

Dane E amp Pratt M G (2007) Exploring intuition and its role in managerial decision making

The Academy of Management Review 32 33-54

De Bondt W Palm F amp Wolff C (2004) Introduction to the special issue on behavioral

finance Journal of Empirical Finance 11 423-427

Dreyfus H amp Dreyfus S (2005) Expertise in real world contexts Organization Studies 26

779-792

Epstein S Pacini R Denes-Raj V amp Heier H (1996) Individual differences in intuitive-

experiential and analytical-rational thinking styles Journal of Personality and Social

Psychology 71 390-405

Ericsson K A Krampe R T amp Tesch-Roemer C (1993) The role of deliberate practice in the

acquisition of expert performance Psychological Review 100 363-406

Ericsson K A (2006) An introduction to the Cambridge Handbook of Expertise and Expert

Performance its development organization and content In K A Ericsson amp N Charness

amp P J Feltovich amp R R Hoffman (Eds) The Cambridge Handbook of Expertise and

Expert Performance 1st ed 3-20 Cambridge Cambridge University Press

Fama E F (1991) Efficient Capital Markets II The Journal of Finance 46 1575-1617

Fama E F (1998) Market efficiency long-term returns and behavioral finance Journal of

Financial Economics Vol 49 283-306

Fenton-OCreevy M Nicholson N Soane E amp Willman P (2005) Traders Risks Decisions

and Management in Financial Markets Oxford Oxford University Press

Finucane M L Alhakami A Slovic P amp Johnson S M (2000) The affect heuristic in

judgments of risks and benefits Journal of Behavioral Decision Making 13(1) 1-17

Forgas JP amp George JM (2001) Affective influences on judgments and behavior in

organizations An information processing perspective Organizational Behavior and

Human Decision Processes 86(1) 3-34

Grandey AA (2000) Emotion Regulation in the Workplace A new way to conceptualize

Emotional Labor Journal of Occupational Health Psychology 5(1) 95-110

33

Grandey A A (2003) When the show must go on surface acting and deep acting as

determinants of emotional exhaustion and peer-rated service delivery Academy of

Management Journal 46 86-96

Gray JA (1999) Cognition emotion conscious experience and the brain In T Dalgleish and

MJ Power (Eds) Handbook of Cognition and Emotion (pp83-102) Chichester England

Wiley

Gross J (2002) Emotion regulation affective cognitive and social consequences

Psychophysiology 39 281

Gross J J amp John O P (2003) Individual differences in two emotion regulation processes

Implications for affect relationships and well-being Journal of Personality and Social

Psychology 85(2) 348-362

Gross J J amp Thompson R A (2007) Emotion regulation Conceptual foundations In J J

Gross (Ed) Handbook of emotion regulation New York NY Guilford Press

Isen A M Shalker T E Clark M amp Karp L (1978) Affect accessibility of material in

memory and behavior A cognitive loop Journal of Personality and Social Psychology

36 1-12

Johnson E amp Tversky A (1983) Affect generalization and the perception of risk Journal of

Personality and Social Psychology 45(1) 20-31

Kavanaugh D amp Bower G (1985) Mood and self-efficacy Impact of job and sadness on

perceived capabilities Cognitive Therapy and Research 9 507-525

Klein G A Calderwood R amp Clinton Cirocco A (1986) Rapid decision-making on the

fireground Human Factors and Ergonomics Society 30th Annual Meeting Vol 1 576-

580

Knorr-Cetina K amp Brugger U (2002) Traders Engagement with Markets A Postsocial

Relationship Theory Culture and Society 19(5-6) 161-185

Labouvie-Vief G (2003) Dynamic integration Affect cognition and the self in adulthood

Current Directions in Psychological Science 12 201-206

Lerner J S amp Keltner D (2001) Fear anger and risk Journal of Personality and Social

Psychology 81(1) 146-159

Lerner J S Small D A amp Loewenstein G (2004) Heart strings and purse strings Carryover

effects of emotions on economic decisions Psychological Science 15(5) 337-341

Lo A Repin D amp Steenbarger B (2005) Fear and greed in financial markets A clinical study

of day traders American Economic Review 95 352-359

Lo A W amp Repin D V (2002) The Psychophysiology of Real-Time Financial Risk

Processing Journal of Cognitive Neuroscience 14 323-339

MacKenzie D (2006) An Engine Not A Camera How Financial Models Shape Markets

Cambridge Mass MIT Press

Mayer JD amp Hanson A (1995) Mood-congruent judgment over time Personality and Social

Psychology Bulletin 21 237-244

Mayer JD DiPaolo M and Salovey P (1990) Perceiving affective content in ambiguous

visual stimuli a component of emotional intelligence Journal of Personality Assessment

54 772-781

Miller G (2003) The cognitive revolution a historical perspective Trends in Cognitive Science

7 141

Muraven M amp Baumeister R F (2000) Self-regulation and depletion of limited resources

Does self-control resemble a muscle Psychological Bulletin 126 247-259

Nicholson N (2000) Managing the Human Animal London ThomsonTexere

34

Peterson R L (2007) Affect and financial decision-making How neuroscience can inform

market participants The Journal of Behavioral Finance 8(2) 70-78

Pham M T (2004) The logic of feeling Journal of Consumer Psychology 14 360-369

Phelps E A (2006) Emotion and cognition Insights from studies of the human amygdala

Annual Review of Psychology 57 27-53

Sayer A (1997) Essentialism social constructionism and beyond The Sociological Review 45

453-487

Shapira Z amp Venezia I (2001) Patterns of behavior of professionally managed and

independent investors Journal of Banking and Finance 25 1573ndash1587

Schunk D amp Betsch C (2006) Explaining the heterogeneity in utility functions by individual

differences in decision modes Journal of Economic Psychology 27 386-401

Schwager J D (1993) Market Wizards Interviews with Top Traders New York Collins

Schwarz N amp Clore G L (1983) Mood misattribution and judgments of well-being

Informative and directive functions of affective states Journal of Personality and Social

Psychology 45 513-523

Seo M G Barrett L F amp Bartunek J M (2004) The role of affective experience in work

motivation Academy of Management Review 29 423-439

Seo M G amp Barrett L F (2007) Being emotional during decision makingmdashgood or bad An

empirical investigation The Academy of Management Journal 50 923-940

Shefrin H (2000) Beyond Greed and Fear Understanding Behavioral Finance and the

Psychology of Investing Boston MA Harvard Business School Press

Stokes A F Kemper K amp Kite K (1997) Aeronautical decision making cue recognition and

expertise under time pressure In C E Zsambok amp G Klein (Eds) Naturalistic Decision

Making pp 183-196 Mahwah NJ Erlbaum

Tamir M (2005) Dont worry be happy Neuroticism trait-consistent affect regulation

and performance Journal of Personality and Social Psychology 89 (3) 449 ndash

461

Thaler R H (1985) Mental accounting and consumer choice Marketing Science 4(3) 199-214

Thaler R H (1993) Advances In Behavioral Finance New York Russel Sage Foundation

Thaler R H (1999) Mental accounting matters Journal of Behavioral Decision Making 12(3)

183-206

Tiedens L amp Linton S (2001) Judgment under emotional certainty and uncertainty the effects

of specific emotions on information processing Journal of Personality and Social

Psychology 81(6) 973-988

Todd P M amp Gigerenzer G (2007) Environments that make us smart Ecological rationality

Current Directions in Psychological Science 16 167-171

Totterdell P Briner R B Parkinson B amp Reynolds S (1996) Fingerprinting time series

dynamic patterns in self-report and performance measures uncovered by a graphical non-

linear method British Journal of Psychology 87(1) 43-60

Weber M amp Welfens F (2008) Splitting the Disposition Effect Asymmetric Reactions

Towards bdquoSelling winners‟ and bdquoHolding Losers‟ Working Paper University of

Mannheim

Wright WF amp Bower GH (1992) Mood effects on subjective probability assessment

Organizational Behavior and Human Decision Processes 52 276ndash91

21

constraints of time and uncertain and incomplete information We consider these points further in

our discussion

Emotional Cues and the Use of Intuition

The second broad theme concerned the role of emotional cues in traderslsquo decision-

making Many of the traders discussed this aspect of emotion as intuition Traderslsquo own accounts

and conceptualizations of intuition fit well with Dane and Prattlsquos (200740) definition of intuition

as ―affectively charged judgments that arise through rapid non-conscious and holistic

associations For example -

ldquo[W]ithout a doubt some of the best bargains are the ones you dont do You know

theyre bad bargains You know It‟s a gut feel Youve looked at the playing field and

you just know this is a bad bargainrdquo 106 high experience moderate pay

Some of the traders see a more subtle and sophisticated role for emotions which represent

an unconscious drawing on experience -

ldquoI think many people do say theyre gut-feel traders but perhaps theyre not analyzing

what theyre actually thinking and theyre seeing a lot of customer flow and a lot of

buyers and they probably dont necessarily realize the reasons why they want to buy

But there are very good traders that say theyre trading off gut feel that I believe

actually have probably reasonable information reasonable thoughts behind it but

they wouldnt literally toss a coinrdquo 55 high experience high pay

Feelings are also seen as a kind of radar directing attention and shaping perceptions

around opportunities to enable them to be promptly seized

ldquoI think what a trader has to have is not necessarily this gut feeling but this nose for

opportunities If an opportunity comes along you have to be able to spot it and see it

22

and sometimes people you typically find in this business - an opportunity is there and

they cant see it and then its taken by someone else and its like oh yeah that was a

good idea but it is gonerdquo 58 high experience low pay

Not only do feelings act as a kind of radar directing attention but they do so in a way that

enables rapid decision making under time pressure As one trader noted -

ldquoTrading includes stuff which is beyond trading Trading is when you make decisions

involving financial risk that have two qualities you have to make them in someone

else‟s time schedule not your own and when you make a decision you have to be

confident when you have incomplete or imperfect information and therefore there

must be some kind of intuitive or qualitative elementrdquo 121 high experience high pay

Experienced traders made much more reference to intuition or gut feellsquo as they often

phrased it than less experienced traders However again there were important differences

between low and high paid traders in the high experience group Low paid traders who talked

about the use of intuition often talked of it in terms of a rather mysterious process You either had

a feeling or not For example

ldquoIt‟s almost like a sixth sense Something comes over you and you feel like - yes I

know they‟re going to be looking to buy these later on or looking to sell these later

onrdquo 116 high experience low pay

By contrast the top paid group tended to reflect critically about the origins of their

intuitions and to bring them together with more objective information -

ldquoIf I do fancy a stock - you have a feeling it feels right it has done nothing for like

two or three months and you‟ve seen sellers and they start to dwindle and it is just

stagnant and then you have a look on the charts you refer to the technical side as

well as the emotional side of the trade So you know a combination of technical and

23

emotional as well as what the analyst thinks as well so you sort of bring the

instruments you have available to you to make the decision rather than the snap

[snaps his finger] I fancy buying thatrdquo 101 high experience high pay

ldquoI may examine opportunities based on intuition that something is going to happen

but the decision is based on something I think is rationalrdquo 68 medium experience

high pay

Reported use of intuition does seem to increase with trader experience However traderslsquo

engagement with their feelings is qualitatively different between low and high performers High

performing traders seem to engage with their intuitions at a meta-cognitive level and make

judgments about the relevance of these feelings to the decision at hand This is consistent with

the growing literature on expertise which points to experience as a necessary but insufficient

condition for the development of expertise and points to the role of extended critical engagement

with practice in developing expertise (Ericsson 2006 Ericsson Krampe amp Tesch-Roemer

1993)

Traders were not universally positive about the role of intuition in market decision making

Some believed reliance on such feelings yields poor outcomes -

ldquoMany traders feel that models have been developed by academics who do not know

markets and [traders] think that gut feeling is more important My experience is that

this is 100 wrong and computers can make better decisions than tradersrdquo 37

medium experience medium pay

Overall however the data support a picture of expert traders having a meta-cognitive

engagement with emotion regulation This process entails discrimination between emotions in

terms of their relevance to the decision at hand and effective strategies for emotion regulation to

enhance performance

24

Empathy

The third identified theme was empathy monitoring own emotions as information

about what other market players might be feeling Only five traders explicitly described

using their own capacity for empathy as a decision making tool Although not frequent in

our data these examples are important illustrating that there is a path for traders beyond

simply seeking to eliminate or reduce the intensity of their emotions These traders

fostered feelings as a source of information about other market actors which they managed

and used in a self-aware analysis One trader described using his own fear as an indicator

of fear in the market Another described actively imagining the feelings of other market

actors ―trying to put myself in [the Bank of England Governorlsquos] feet to develop a feel for

how he feels and thinks 14 high experience high pay

Three traders talked about an emotional affinity with the feelings of people in

national markets (Spain 34 high experience medium pay Italy 70 medium experience

low pay and Japan 117 high experience medium pay) with whom they shared a common

culture and propensity to react emotionally in similar ways to the same market events This

group was small but these data broaden the picture of traders reasoning with emotionlsquo

and offer a potentially rich and fruitful avenue for future research

DISCUSSION AND CONCLUSIONS

To ask whether emotion disturbs or aids traderslsquo decision-making is to ask the wrong

question Traderslsquo emotions and cognition are inextricably linked Therefore a more productive

question to ask in this context is whether there are more or less effective strategies for managing

and using emotion in financial decision-making This has been the thrust of our analysis which

25

sought to move beyond previous work that simply characterizes emotional arousal as detrimental

to performance (eg Lo et al 2005 Schunk and Bersh 2006) The study contributes to our

understanding of the role of emotions in work and decision-making in several distinct ways In

contributing to our understanding of the role of emotion at work this study has particular

relevance in that it considers a work domain which has been theorized as strongly normatively

rational as opposed to a work domain (such as negotiation or customer service) where

performance is primarily dependent on effective social interaction However it is clear from this

study that even within such an analysis-intensive domain as financial trading emotion plays a

central role Traders and their managers are frequently preoccupied with the effective regulation

and use of emotions in their work Our work points to the value of a more nuanced understanding

which considers the role of emotions in decision-making the differential impact of various

emotion regulation strategies the conditions under which gut-feellsquo may support effective

decision-making and the role of empathic responses in understanding the behavior of other

market actors

Effective emotion regulation seems to be a critical success factor in trading for our

findings suggest that the strategies for emotion regulation adopted by expert higher performing

traders are qualitatively different from those of lower performing traders In particular higher

performers are more inclined to regulate emotions through attentional deployment and cognitive

change and may display a willingness to cope with negative feelings in the interests of

maintaining objectivity and pursuing longer term goals The kind of attention and appraisal-

focused emotion regulation strategies used by high-performing traders do not seem to be too

cognitively expensive and are effective in reducing negative experience of emotion (Gross

2002) By contrast less expert traders engage either in avoidant behaviors such as walking

away from the desk or invest significant cognitive effort in modulating their emotional

26

responses This extends previous findings (eg Grandey 2003) concerning the performance

benefits of antecedent versus response-focused emotion regulation in the context of emotion

labor to the very different context of financial decision-making Our findings also suggest that

willingness to endure negative feelings in pursuit of long-term goals may be more adaptive than

purely defensive strategies aimed at maintaining positive feelings (Labouvie-Vief 2003 Tamir

2005)

This study also provides evidence that more effective emotion regulation strategies can be

learned in a financial decision-making context While an individuallsquos preferred approach to

emotion regulation is likely to be influenced by personality traits neuroticism and extroversion in

particular (Gross amp John 2003) our interviews with traders and their managers also point to the

importance of traderslsquo learned strategies for emotion regulation Importantly our study also

suggests that defensive emotion regulation strategies may be problematic because they reduce

opportunities to exercise expert intuition

These findings go well beyond prior research on emotion regulation and performance

(eg Grandey 2003) which has a primary focus on performance in the context of interpersonal

interaction Our findings uniquely address the performance of professional traders for whom

performance is not primarily dependent on interpersonal interaction and which has been

theorized as strongly rational involving the selection of optimal strategies in the face of complex

cognitive demands and requiring attention to a large volume of information with uncertain

relevance

Turning to intuition traders in our study mirror the balance of opinion in the research

literature on intuition They are equivocal about whether feelings and hunches about appropriate

courses of action lead to better or worse outcomes than purely rational analysis There were

strong feelings on both sides with traders being quite evenly divided between the two camps

27

However again our study suggests the importance of a more nuanced approach than simply

asking whether reliance on intuition is good or bad and points towards the conditions in which

reliance on intuitive judgment may be more and less effective The findings suggest that one

characteristic of higher performing traders may be a greater willingness to reflect critically about

their intuitions and feelings about trading These traders often reported relying on intuition but

they tend to weigh their feelings critically alongside other evidence and to reflect about the

provenance of those feelings Lower performing traders may rely on feelings alone and show

less propensity to think critically about the source of hunches This reflection by expert traders

about the provenance of feelings may be particularly salient given Schwarz and Clorelsquos (1983

2003) finding that the impact of emotions on behavior is reduced or disappears when the

relevance of those emotions is explicitly called into question

That traderslsquo reliance on affective cues in decision-making can support effective

performance is consistent with Damasiolsquos observation that deciding advantageously depends on

the use of affective cues in both learning and deciding (Bechara et al 1997 Damasio 1994)

There is increasing evidence that humans are naturally proficient in the ability to acquire

expertise and that encapsulation of experience in expert intuition and perception via system one

provides a means of by-passing cognitive limits (Ericsson 2006) The nature of expertise could

counteract the inherent environmental uncertainties that Tiedens and Linton (2001) identified as

leading to more conscious appraisal of information While not an unequivocal result our finding

of greater critical engagement among higher performing traders with intuitions and their more

sophisticated deployment of intuition in combination with analysis suggests an important

direction for future research

The small number of accounts of traders monitoring their own emotions as a source of

information about the emotions of other market actors was intriguing These data suggest a

28

possibly productive avenue for future research We do not have evidence of performance

outcomes of predictive uses of empathy in this manner but our findings are consistent with

arguments that the evolution of the human brain has been significantly driven by the need to

predict the behavior of other humans often via subtle cues (eg Nicholson 2000)

We suggest that the identification of links between decision-making performance and

emotion regulation in this study has important implications for theory development in two key

fields First while somewhat tacit in much of the literature the implication of many claims in the

decision-making and behavioral finance literatures is that a range of key decision-making biases

are underpinned by mechanisms which involve emotion processes One relevant explicit example

is Thalerlsquos (1985 1999) account of the role of hedonic editinglsquo in mental accounting and the

disposition effect (the tendency to hold losing assets longer than winning assets) This explains

key biases in terms of the desire to maintain positive hedonic tone There is evidence too of

interpersonal variation in propensity to exhibit such biases for example investors vary in their

propensity to exhibit the disposition effect (Shapira amp Venezia 2001 Weber amp Welfens 2008)

In this study we have seen that traders seek to regulate emotions in order to avoid decision biases

and that higher performing traders typically exhibit more sophisticated emotion regulation

strategies This suggests that it would be productive to investigate the role of emotion regulation

as one key source of interpersonal variation in susceptibility to a range of decision biases

A second implication concerns the role of emotion in expert performance While much

attention has been paid to the nature of cognition in expert performance the expertise literature

hardly considers the role of emotion For example examining the index of the Cambridge

Handbook of Expertise and Expert Performance (Ericsson et al 2006) reveals very few

references to emotion and these are peripheral to the main arguments of the chapters which

contain them Our research suggests first that effective emotion regulation may be an important

29

facet of expert performance and second that greater attention should be paid to the interactions

between emotion emotion regulation and expert intuition Further research could test the

proposition that effective expert intuition is reduced by reliance on defensive emotion regulation

strategies

While our study points to the importance of intuition in traderslsquo work it may be that the

relative importance of intuition and analysis vary with task characteristics such as time span of

decision-making Certainly this seemed to be the view of several senior managers with

responsibility for allocating traders to trading roles The interplay that expert traders described

between intuition and analysis is also intriguing The importance of context to the role of affect

in decision-making has been noted in prior research (Forgas amp George 2001) Further research

could usefully explore this aspect of traderslsquo expertise

This study also contains some potentially important implications for practice First it

points to the importance of learned strategies for emotion regulation and the need for effective

support for their development Second our data directly and indirectly point to the key role of

management in this process Our findings suggest that there may be considerable benefits to

skilled managerial interventions that help to steer effective emotion regulation and support

inexperienced traders in developing emotion regulation skills Additionally managers may be

able to help traders to understand the productive role that critically engaged experience-based

intuition may play in decision-making Our evidence suggests that many high performing traders

deploy a reflective and critical approach to the use and development of intuition well-founded in

experience Managers could help to guide this process through coaching The contextual

dependence of high quality intuitions suggests they are quite domain specific and may not

transfer across contexts As several informants told us this is especially true for traders operating

under different market conditions

30

We heard repeated concerns from senior managers who worried about traders who had

not seen a bear market and would not operate well when that occurred We also heard many

stories of people transferring between trading areas and needing time to re-contextualize

expertise before their intuitions could be considered reliable Thus managers have a role in

helping traders to extend the boundaries of their expertise Given recent events in financial

markets our findings may be relevant to an understanding of how traders react under massively

changed trading conditions and how those reactions might either contribute to or result from

market volatility

This research has some important limitations First although we have argued for the

importance of an account of emotion that includes the experience of emotion as Pham (2004

368) notes the affective system is focused on the present Thus people can be poor at recalling or

predicting emotions There are limits to the human capacity to introspect on emotion processes

and to recall the experience of emotion These limits are also subject to wide individual

differences The capacity for introspection and recall will also vary between individuals For this

reason studies such as ours need to be complemented with more physiologically based research

as well as further qualitative and quantitative studies

Second as in all work contexts traders subscribe to norms of socially sanctioned

behavior and to common narratives about the nature of their work We have not treated emotional

labor as a primary component of traderslsquo work and performance The majority of work

interactions are carried out through highly abbreviated electronic exchanges which provide a poor

medium for the communication of emotion However there is a sense in which traders engage in

emotional labor since especially for novices there are social pressures to comply with display

rules which emphasize the avoidance of displays of strong emotion One common narrative

thread that ran though many traderslsquo accounts of their work was a representation of trading work

31

as principally concerned with rational analysis from which emotions are a dangerous distraction

This narrative seemed particularly strong in the accounts of less experienced traders Although as

we have seen the mask would often slip as they discussed their work Some traderslsquo accounts

were clearly colored by a desire to conform to this mode of self-presentation In consequence it is

possible that in our interviews and during data analysis we were at times unable to distinguish

effectively between defensive denial of emotion and effective regulation of emotion This would

be another avenue for future research

To conclude we know that emotions are a rich source of experience in everyday life but

at the same time in work contexts they can be a source of vulnerability a wayward influence over

judgment and a source of disturbance to process The more ―rational-economic such

environments are the more likely we are to hold such beliefs (Nicholson 2000) Our research

illustrates that this position is false or at best short-sighted In the hyper-rational world of

trading in financial markets we did find some evidence that emotions disturbed performance but

mostly among the inexperienced and un-reflective traders The best traders are able to regulate

emotions effectively and incorporate relevant emotions as information ndash signals or a kind of

radar that contain information about risks what is going on in the minds of others and the weight

and relevance to be accorded to onelsquos own past experience

32

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Bargh J A Chen M amp Burrows L (1996) Automaticity of social behavior Direct effects of

trait construct and stereotype activation on action Journal of Personality and Social

Psychology 71 230-244

Baumeister R F Bratslavsky E Muraven M amp Tice D M (1998) Ego depletion Is the

active self a limited resource Journal of Personality and Social Psychology 74 1252-

1265

Bechara A Damasio A Tranel D amp Damasio A R (1997) Deciding advantageously before

knowing the advantageous strategy Science 275 1293-1295

Bower G H (1981) Mood and memory American Psychologist 36 129 ndash 148

Bower G H (1991) Mood congruity of social judgments In J P Forgas (Ed) Emotion and

social judgments (pp 31ndash53) Oxford Pergamon Press

Braun V amp Clarke V (2006) Using thematic analysis in psychology Qualitative Research in

Psychology 3(2) 77-101

Buck R (1999) The biological affects a typology Psychological Reveiw 106 301-336

Damasio A R (1994) Descartes‟ error Emotion reason and the human brain New York

Putnam

Dane E amp Pratt M G (2007) Exploring intuition and its role in managerial decision making

The Academy of Management Review 32 33-54

De Bondt W Palm F amp Wolff C (2004) Introduction to the special issue on behavioral

finance Journal of Empirical Finance 11 423-427

Dreyfus H amp Dreyfus S (2005) Expertise in real world contexts Organization Studies 26

779-792

Epstein S Pacini R Denes-Raj V amp Heier H (1996) Individual differences in intuitive-

experiential and analytical-rational thinking styles Journal of Personality and Social

Psychology 71 390-405

Ericsson K A Krampe R T amp Tesch-Roemer C (1993) The role of deliberate practice in the

acquisition of expert performance Psychological Review 100 363-406

Ericsson K A (2006) An introduction to the Cambridge Handbook of Expertise and Expert

Performance its development organization and content In K A Ericsson amp N Charness

amp P J Feltovich amp R R Hoffman (Eds) The Cambridge Handbook of Expertise and

Expert Performance 1st ed 3-20 Cambridge Cambridge University Press

Fama E F (1991) Efficient Capital Markets II The Journal of Finance 46 1575-1617

Fama E F (1998) Market efficiency long-term returns and behavioral finance Journal of

Financial Economics Vol 49 283-306

Fenton-OCreevy M Nicholson N Soane E amp Willman P (2005) Traders Risks Decisions

and Management in Financial Markets Oxford Oxford University Press

Finucane M L Alhakami A Slovic P amp Johnson S M (2000) The affect heuristic in

judgments of risks and benefits Journal of Behavioral Decision Making 13(1) 1-17

Forgas JP amp George JM (2001) Affective influences on judgments and behavior in

organizations An information processing perspective Organizational Behavior and

Human Decision Processes 86(1) 3-34

Grandey AA (2000) Emotion Regulation in the Workplace A new way to conceptualize

Emotional Labor Journal of Occupational Health Psychology 5(1) 95-110

33

Grandey A A (2003) When the show must go on surface acting and deep acting as

determinants of emotional exhaustion and peer-rated service delivery Academy of

Management Journal 46 86-96

Gray JA (1999) Cognition emotion conscious experience and the brain In T Dalgleish and

MJ Power (Eds) Handbook of Cognition and Emotion (pp83-102) Chichester England

Wiley

Gross J (2002) Emotion regulation affective cognitive and social consequences

Psychophysiology 39 281

Gross J J amp John O P (2003) Individual differences in two emotion regulation processes

Implications for affect relationships and well-being Journal of Personality and Social

Psychology 85(2) 348-362

Gross J J amp Thompson R A (2007) Emotion regulation Conceptual foundations In J J

Gross (Ed) Handbook of emotion regulation New York NY Guilford Press

Isen A M Shalker T E Clark M amp Karp L (1978) Affect accessibility of material in

memory and behavior A cognitive loop Journal of Personality and Social Psychology

36 1-12

Johnson E amp Tversky A (1983) Affect generalization and the perception of risk Journal of

Personality and Social Psychology 45(1) 20-31

Kavanaugh D amp Bower G (1985) Mood and self-efficacy Impact of job and sadness on

perceived capabilities Cognitive Therapy and Research 9 507-525

Klein G A Calderwood R amp Clinton Cirocco A (1986) Rapid decision-making on the

fireground Human Factors and Ergonomics Society 30th Annual Meeting Vol 1 576-

580

Knorr-Cetina K amp Brugger U (2002) Traders Engagement with Markets A Postsocial

Relationship Theory Culture and Society 19(5-6) 161-185

Labouvie-Vief G (2003) Dynamic integration Affect cognition and the self in adulthood

Current Directions in Psychological Science 12 201-206

Lerner J S amp Keltner D (2001) Fear anger and risk Journal of Personality and Social

Psychology 81(1) 146-159

Lerner J S Small D A amp Loewenstein G (2004) Heart strings and purse strings Carryover

effects of emotions on economic decisions Psychological Science 15(5) 337-341

Lo A Repin D amp Steenbarger B (2005) Fear and greed in financial markets A clinical study

of day traders American Economic Review 95 352-359

Lo A W amp Repin D V (2002) The Psychophysiology of Real-Time Financial Risk

Processing Journal of Cognitive Neuroscience 14 323-339

MacKenzie D (2006) An Engine Not A Camera How Financial Models Shape Markets

Cambridge Mass MIT Press

Mayer JD amp Hanson A (1995) Mood-congruent judgment over time Personality and Social

Psychology Bulletin 21 237-244

Mayer JD DiPaolo M and Salovey P (1990) Perceiving affective content in ambiguous

visual stimuli a component of emotional intelligence Journal of Personality Assessment

54 772-781

Miller G (2003) The cognitive revolution a historical perspective Trends in Cognitive Science

7 141

Muraven M amp Baumeister R F (2000) Self-regulation and depletion of limited resources

Does self-control resemble a muscle Psychological Bulletin 126 247-259

Nicholson N (2000) Managing the Human Animal London ThomsonTexere

34

Peterson R L (2007) Affect and financial decision-making How neuroscience can inform

market participants The Journal of Behavioral Finance 8(2) 70-78

Pham M T (2004) The logic of feeling Journal of Consumer Psychology 14 360-369

Phelps E A (2006) Emotion and cognition Insights from studies of the human amygdala

Annual Review of Psychology 57 27-53

Sayer A (1997) Essentialism social constructionism and beyond The Sociological Review 45

453-487

Shapira Z amp Venezia I (2001) Patterns of behavior of professionally managed and

independent investors Journal of Banking and Finance 25 1573ndash1587

Schunk D amp Betsch C (2006) Explaining the heterogeneity in utility functions by individual

differences in decision modes Journal of Economic Psychology 27 386-401

Schwager J D (1993) Market Wizards Interviews with Top Traders New York Collins

Schwarz N amp Clore G L (1983) Mood misattribution and judgments of well-being

Informative and directive functions of affective states Journal of Personality and Social

Psychology 45 513-523

Seo M G Barrett L F amp Bartunek J M (2004) The role of affective experience in work

motivation Academy of Management Review 29 423-439

Seo M G amp Barrett L F (2007) Being emotional during decision makingmdashgood or bad An

empirical investigation The Academy of Management Journal 50 923-940

Shefrin H (2000) Beyond Greed and Fear Understanding Behavioral Finance and the

Psychology of Investing Boston MA Harvard Business School Press

Stokes A F Kemper K amp Kite K (1997) Aeronautical decision making cue recognition and

expertise under time pressure In C E Zsambok amp G Klein (Eds) Naturalistic Decision

Making pp 183-196 Mahwah NJ Erlbaum

Tamir M (2005) Dont worry be happy Neuroticism trait-consistent affect regulation

and performance Journal of Personality and Social Psychology 89 (3) 449 ndash

461

Thaler R H (1985) Mental accounting and consumer choice Marketing Science 4(3) 199-214

Thaler R H (1993) Advances In Behavioral Finance New York Russel Sage Foundation

Thaler R H (1999) Mental accounting matters Journal of Behavioral Decision Making 12(3)

183-206

Tiedens L amp Linton S (2001) Judgment under emotional certainty and uncertainty the effects

of specific emotions on information processing Journal of Personality and Social

Psychology 81(6) 973-988

Todd P M amp Gigerenzer G (2007) Environments that make us smart Ecological rationality

Current Directions in Psychological Science 16 167-171

Totterdell P Briner R B Parkinson B amp Reynolds S (1996) Fingerprinting time series

dynamic patterns in self-report and performance measures uncovered by a graphical non-

linear method British Journal of Psychology 87(1) 43-60

Weber M amp Welfens F (2008) Splitting the Disposition Effect Asymmetric Reactions

Towards bdquoSelling winners‟ and bdquoHolding Losers‟ Working Paper University of

Mannheim

Wright WF amp Bower GH (1992) Mood effects on subjective probability assessment

Organizational Behavior and Human Decision Processes 52 276ndash91

22

and sometimes people you typically find in this business - an opportunity is there and

they cant see it and then its taken by someone else and its like oh yeah that was a

good idea but it is gonerdquo 58 high experience low pay

Not only do feelings act as a kind of radar directing attention but they do so in a way that

enables rapid decision making under time pressure As one trader noted -

ldquoTrading includes stuff which is beyond trading Trading is when you make decisions

involving financial risk that have two qualities you have to make them in someone

else‟s time schedule not your own and when you make a decision you have to be

confident when you have incomplete or imperfect information and therefore there

must be some kind of intuitive or qualitative elementrdquo 121 high experience high pay

Experienced traders made much more reference to intuition or gut feellsquo as they often

phrased it than less experienced traders However again there were important differences

between low and high paid traders in the high experience group Low paid traders who talked

about the use of intuition often talked of it in terms of a rather mysterious process You either had

a feeling or not For example

ldquoIt‟s almost like a sixth sense Something comes over you and you feel like - yes I

know they‟re going to be looking to buy these later on or looking to sell these later

onrdquo 116 high experience low pay

By contrast the top paid group tended to reflect critically about the origins of their

intuitions and to bring them together with more objective information -

ldquoIf I do fancy a stock - you have a feeling it feels right it has done nothing for like

two or three months and you‟ve seen sellers and they start to dwindle and it is just

stagnant and then you have a look on the charts you refer to the technical side as

well as the emotional side of the trade So you know a combination of technical and

23

emotional as well as what the analyst thinks as well so you sort of bring the

instruments you have available to you to make the decision rather than the snap

[snaps his finger] I fancy buying thatrdquo 101 high experience high pay

ldquoI may examine opportunities based on intuition that something is going to happen

but the decision is based on something I think is rationalrdquo 68 medium experience

high pay

Reported use of intuition does seem to increase with trader experience However traderslsquo

engagement with their feelings is qualitatively different between low and high performers High

performing traders seem to engage with their intuitions at a meta-cognitive level and make

judgments about the relevance of these feelings to the decision at hand This is consistent with

the growing literature on expertise which points to experience as a necessary but insufficient

condition for the development of expertise and points to the role of extended critical engagement

with practice in developing expertise (Ericsson 2006 Ericsson Krampe amp Tesch-Roemer

1993)

Traders were not universally positive about the role of intuition in market decision making

Some believed reliance on such feelings yields poor outcomes -

ldquoMany traders feel that models have been developed by academics who do not know

markets and [traders] think that gut feeling is more important My experience is that

this is 100 wrong and computers can make better decisions than tradersrdquo 37

medium experience medium pay

Overall however the data support a picture of expert traders having a meta-cognitive

engagement with emotion regulation This process entails discrimination between emotions in

terms of their relevance to the decision at hand and effective strategies for emotion regulation to

enhance performance

24

Empathy

The third identified theme was empathy monitoring own emotions as information

about what other market players might be feeling Only five traders explicitly described

using their own capacity for empathy as a decision making tool Although not frequent in

our data these examples are important illustrating that there is a path for traders beyond

simply seeking to eliminate or reduce the intensity of their emotions These traders

fostered feelings as a source of information about other market actors which they managed

and used in a self-aware analysis One trader described using his own fear as an indicator

of fear in the market Another described actively imagining the feelings of other market

actors ―trying to put myself in [the Bank of England Governorlsquos] feet to develop a feel for

how he feels and thinks 14 high experience high pay

Three traders talked about an emotional affinity with the feelings of people in

national markets (Spain 34 high experience medium pay Italy 70 medium experience

low pay and Japan 117 high experience medium pay) with whom they shared a common

culture and propensity to react emotionally in similar ways to the same market events This

group was small but these data broaden the picture of traders reasoning with emotionlsquo

and offer a potentially rich and fruitful avenue for future research

DISCUSSION AND CONCLUSIONS

To ask whether emotion disturbs or aids traderslsquo decision-making is to ask the wrong

question Traderslsquo emotions and cognition are inextricably linked Therefore a more productive

question to ask in this context is whether there are more or less effective strategies for managing

and using emotion in financial decision-making This has been the thrust of our analysis which

25

sought to move beyond previous work that simply characterizes emotional arousal as detrimental

to performance (eg Lo et al 2005 Schunk and Bersh 2006) The study contributes to our

understanding of the role of emotions in work and decision-making in several distinct ways In

contributing to our understanding of the role of emotion at work this study has particular

relevance in that it considers a work domain which has been theorized as strongly normatively

rational as opposed to a work domain (such as negotiation or customer service) where

performance is primarily dependent on effective social interaction However it is clear from this

study that even within such an analysis-intensive domain as financial trading emotion plays a

central role Traders and their managers are frequently preoccupied with the effective regulation

and use of emotions in their work Our work points to the value of a more nuanced understanding

which considers the role of emotions in decision-making the differential impact of various

emotion regulation strategies the conditions under which gut-feellsquo may support effective

decision-making and the role of empathic responses in understanding the behavior of other

market actors

Effective emotion regulation seems to be a critical success factor in trading for our

findings suggest that the strategies for emotion regulation adopted by expert higher performing

traders are qualitatively different from those of lower performing traders In particular higher

performers are more inclined to regulate emotions through attentional deployment and cognitive

change and may display a willingness to cope with negative feelings in the interests of

maintaining objectivity and pursuing longer term goals The kind of attention and appraisal-

focused emotion regulation strategies used by high-performing traders do not seem to be too

cognitively expensive and are effective in reducing negative experience of emotion (Gross

2002) By contrast less expert traders engage either in avoidant behaviors such as walking

away from the desk or invest significant cognitive effort in modulating their emotional

26

responses This extends previous findings (eg Grandey 2003) concerning the performance

benefits of antecedent versus response-focused emotion regulation in the context of emotion

labor to the very different context of financial decision-making Our findings also suggest that

willingness to endure negative feelings in pursuit of long-term goals may be more adaptive than

purely defensive strategies aimed at maintaining positive feelings (Labouvie-Vief 2003 Tamir

2005)

This study also provides evidence that more effective emotion regulation strategies can be

learned in a financial decision-making context While an individuallsquos preferred approach to

emotion regulation is likely to be influenced by personality traits neuroticism and extroversion in

particular (Gross amp John 2003) our interviews with traders and their managers also point to the

importance of traderslsquo learned strategies for emotion regulation Importantly our study also

suggests that defensive emotion regulation strategies may be problematic because they reduce

opportunities to exercise expert intuition

These findings go well beyond prior research on emotion regulation and performance

(eg Grandey 2003) which has a primary focus on performance in the context of interpersonal

interaction Our findings uniquely address the performance of professional traders for whom

performance is not primarily dependent on interpersonal interaction and which has been

theorized as strongly rational involving the selection of optimal strategies in the face of complex

cognitive demands and requiring attention to a large volume of information with uncertain

relevance

Turning to intuition traders in our study mirror the balance of opinion in the research

literature on intuition They are equivocal about whether feelings and hunches about appropriate

courses of action lead to better or worse outcomes than purely rational analysis There were

strong feelings on both sides with traders being quite evenly divided between the two camps

27

However again our study suggests the importance of a more nuanced approach than simply

asking whether reliance on intuition is good or bad and points towards the conditions in which

reliance on intuitive judgment may be more and less effective The findings suggest that one

characteristic of higher performing traders may be a greater willingness to reflect critically about

their intuitions and feelings about trading These traders often reported relying on intuition but

they tend to weigh their feelings critically alongside other evidence and to reflect about the

provenance of those feelings Lower performing traders may rely on feelings alone and show

less propensity to think critically about the source of hunches This reflection by expert traders

about the provenance of feelings may be particularly salient given Schwarz and Clorelsquos (1983

2003) finding that the impact of emotions on behavior is reduced or disappears when the

relevance of those emotions is explicitly called into question

That traderslsquo reliance on affective cues in decision-making can support effective

performance is consistent with Damasiolsquos observation that deciding advantageously depends on

the use of affective cues in both learning and deciding (Bechara et al 1997 Damasio 1994)

There is increasing evidence that humans are naturally proficient in the ability to acquire

expertise and that encapsulation of experience in expert intuition and perception via system one

provides a means of by-passing cognitive limits (Ericsson 2006) The nature of expertise could

counteract the inherent environmental uncertainties that Tiedens and Linton (2001) identified as

leading to more conscious appraisal of information While not an unequivocal result our finding

of greater critical engagement among higher performing traders with intuitions and their more

sophisticated deployment of intuition in combination with analysis suggests an important

direction for future research

The small number of accounts of traders monitoring their own emotions as a source of

information about the emotions of other market actors was intriguing These data suggest a

28

possibly productive avenue for future research We do not have evidence of performance

outcomes of predictive uses of empathy in this manner but our findings are consistent with

arguments that the evolution of the human brain has been significantly driven by the need to

predict the behavior of other humans often via subtle cues (eg Nicholson 2000)

We suggest that the identification of links between decision-making performance and

emotion regulation in this study has important implications for theory development in two key

fields First while somewhat tacit in much of the literature the implication of many claims in the

decision-making and behavioral finance literatures is that a range of key decision-making biases

are underpinned by mechanisms which involve emotion processes One relevant explicit example

is Thalerlsquos (1985 1999) account of the role of hedonic editinglsquo in mental accounting and the

disposition effect (the tendency to hold losing assets longer than winning assets) This explains

key biases in terms of the desire to maintain positive hedonic tone There is evidence too of

interpersonal variation in propensity to exhibit such biases for example investors vary in their

propensity to exhibit the disposition effect (Shapira amp Venezia 2001 Weber amp Welfens 2008)

In this study we have seen that traders seek to regulate emotions in order to avoid decision biases

and that higher performing traders typically exhibit more sophisticated emotion regulation

strategies This suggests that it would be productive to investigate the role of emotion regulation

as one key source of interpersonal variation in susceptibility to a range of decision biases

A second implication concerns the role of emotion in expert performance While much

attention has been paid to the nature of cognition in expert performance the expertise literature

hardly considers the role of emotion For example examining the index of the Cambridge

Handbook of Expertise and Expert Performance (Ericsson et al 2006) reveals very few

references to emotion and these are peripheral to the main arguments of the chapters which

contain them Our research suggests first that effective emotion regulation may be an important

29

facet of expert performance and second that greater attention should be paid to the interactions

between emotion emotion regulation and expert intuition Further research could test the

proposition that effective expert intuition is reduced by reliance on defensive emotion regulation

strategies

While our study points to the importance of intuition in traderslsquo work it may be that the

relative importance of intuition and analysis vary with task characteristics such as time span of

decision-making Certainly this seemed to be the view of several senior managers with

responsibility for allocating traders to trading roles The interplay that expert traders described

between intuition and analysis is also intriguing The importance of context to the role of affect

in decision-making has been noted in prior research (Forgas amp George 2001) Further research

could usefully explore this aspect of traderslsquo expertise

This study also contains some potentially important implications for practice First it

points to the importance of learned strategies for emotion regulation and the need for effective

support for their development Second our data directly and indirectly point to the key role of

management in this process Our findings suggest that there may be considerable benefits to

skilled managerial interventions that help to steer effective emotion regulation and support

inexperienced traders in developing emotion regulation skills Additionally managers may be

able to help traders to understand the productive role that critically engaged experience-based

intuition may play in decision-making Our evidence suggests that many high performing traders

deploy a reflective and critical approach to the use and development of intuition well-founded in

experience Managers could help to guide this process through coaching The contextual

dependence of high quality intuitions suggests they are quite domain specific and may not

transfer across contexts As several informants told us this is especially true for traders operating

under different market conditions

30

We heard repeated concerns from senior managers who worried about traders who had

not seen a bear market and would not operate well when that occurred We also heard many

stories of people transferring between trading areas and needing time to re-contextualize

expertise before their intuitions could be considered reliable Thus managers have a role in

helping traders to extend the boundaries of their expertise Given recent events in financial

markets our findings may be relevant to an understanding of how traders react under massively

changed trading conditions and how those reactions might either contribute to or result from

market volatility

This research has some important limitations First although we have argued for the

importance of an account of emotion that includes the experience of emotion as Pham (2004

368) notes the affective system is focused on the present Thus people can be poor at recalling or

predicting emotions There are limits to the human capacity to introspect on emotion processes

and to recall the experience of emotion These limits are also subject to wide individual

differences The capacity for introspection and recall will also vary between individuals For this

reason studies such as ours need to be complemented with more physiologically based research

as well as further qualitative and quantitative studies

Second as in all work contexts traders subscribe to norms of socially sanctioned

behavior and to common narratives about the nature of their work We have not treated emotional

labor as a primary component of traderslsquo work and performance The majority of work

interactions are carried out through highly abbreviated electronic exchanges which provide a poor

medium for the communication of emotion However there is a sense in which traders engage in

emotional labor since especially for novices there are social pressures to comply with display

rules which emphasize the avoidance of displays of strong emotion One common narrative

thread that ran though many traderslsquo accounts of their work was a representation of trading work

31

as principally concerned with rational analysis from which emotions are a dangerous distraction

This narrative seemed particularly strong in the accounts of less experienced traders Although as

we have seen the mask would often slip as they discussed their work Some traderslsquo accounts

were clearly colored by a desire to conform to this mode of self-presentation In consequence it is

possible that in our interviews and during data analysis we were at times unable to distinguish

effectively between defensive denial of emotion and effective regulation of emotion This would

be another avenue for future research

To conclude we know that emotions are a rich source of experience in everyday life but

at the same time in work contexts they can be a source of vulnerability a wayward influence over

judgment and a source of disturbance to process The more ―rational-economic such

environments are the more likely we are to hold such beliefs (Nicholson 2000) Our research

illustrates that this position is false or at best short-sighted In the hyper-rational world of

trading in financial markets we did find some evidence that emotions disturbed performance but

mostly among the inexperienced and un-reflective traders The best traders are able to regulate

emotions effectively and incorporate relevant emotions as information ndash signals or a kind of

radar that contain information about risks what is going on in the minds of others and the weight

and relevance to be accorded to onelsquos own past experience

32

REFERENCES

Bargh J A Chen M amp Burrows L (1996) Automaticity of social behavior Direct effects of

trait construct and stereotype activation on action Journal of Personality and Social

Psychology 71 230-244

Baumeister R F Bratslavsky E Muraven M amp Tice D M (1998) Ego depletion Is the

active self a limited resource Journal of Personality and Social Psychology 74 1252-

1265

Bechara A Damasio A Tranel D amp Damasio A R (1997) Deciding advantageously before

knowing the advantageous strategy Science 275 1293-1295

Bower G H (1981) Mood and memory American Psychologist 36 129 ndash 148

Bower G H (1991) Mood congruity of social judgments In J P Forgas (Ed) Emotion and

social judgments (pp 31ndash53) Oxford Pergamon Press

Braun V amp Clarke V (2006) Using thematic analysis in psychology Qualitative Research in

Psychology 3(2) 77-101

Buck R (1999) The biological affects a typology Psychological Reveiw 106 301-336

Damasio A R (1994) Descartes‟ error Emotion reason and the human brain New York

Putnam

Dane E amp Pratt M G (2007) Exploring intuition and its role in managerial decision making

The Academy of Management Review 32 33-54

De Bondt W Palm F amp Wolff C (2004) Introduction to the special issue on behavioral

finance Journal of Empirical Finance 11 423-427

Dreyfus H amp Dreyfus S (2005) Expertise in real world contexts Organization Studies 26

779-792

Epstein S Pacini R Denes-Raj V amp Heier H (1996) Individual differences in intuitive-

experiential and analytical-rational thinking styles Journal of Personality and Social

Psychology 71 390-405

Ericsson K A Krampe R T amp Tesch-Roemer C (1993) The role of deliberate practice in the

acquisition of expert performance Psychological Review 100 363-406

Ericsson K A (2006) An introduction to the Cambridge Handbook of Expertise and Expert

Performance its development organization and content In K A Ericsson amp N Charness

amp P J Feltovich amp R R Hoffman (Eds) The Cambridge Handbook of Expertise and

Expert Performance 1st ed 3-20 Cambridge Cambridge University Press

Fama E F (1991) Efficient Capital Markets II The Journal of Finance 46 1575-1617

Fama E F (1998) Market efficiency long-term returns and behavioral finance Journal of

Financial Economics Vol 49 283-306

Fenton-OCreevy M Nicholson N Soane E amp Willman P (2005) Traders Risks Decisions

and Management in Financial Markets Oxford Oxford University Press

Finucane M L Alhakami A Slovic P amp Johnson S M (2000) The affect heuristic in

judgments of risks and benefits Journal of Behavioral Decision Making 13(1) 1-17

Forgas JP amp George JM (2001) Affective influences on judgments and behavior in

organizations An information processing perspective Organizational Behavior and

Human Decision Processes 86(1) 3-34

Grandey AA (2000) Emotion Regulation in the Workplace A new way to conceptualize

Emotional Labor Journal of Occupational Health Psychology 5(1) 95-110

33

Grandey A A (2003) When the show must go on surface acting and deep acting as

determinants of emotional exhaustion and peer-rated service delivery Academy of

Management Journal 46 86-96

Gray JA (1999) Cognition emotion conscious experience and the brain In T Dalgleish and

MJ Power (Eds) Handbook of Cognition and Emotion (pp83-102) Chichester England

Wiley

Gross J (2002) Emotion regulation affective cognitive and social consequences

Psychophysiology 39 281

Gross J J amp John O P (2003) Individual differences in two emotion regulation processes

Implications for affect relationships and well-being Journal of Personality and Social

Psychology 85(2) 348-362

Gross J J amp Thompson R A (2007) Emotion regulation Conceptual foundations In J J

Gross (Ed) Handbook of emotion regulation New York NY Guilford Press

Isen A M Shalker T E Clark M amp Karp L (1978) Affect accessibility of material in

memory and behavior A cognitive loop Journal of Personality and Social Psychology

36 1-12

Johnson E amp Tversky A (1983) Affect generalization and the perception of risk Journal of

Personality and Social Psychology 45(1) 20-31

Kavanaugh D amp Bower G (1985) Mood and self-efficacy Impact of job and sadness on

perceived capabilities Cognitive Therapy and Research 9 507-525

Klein G A Calderwood R amp Clinton Cirocco A (1986) Rapid decision-making on the

fireground Human Factors and Ergonomics Society 30th Annual Meeting Vol 1 576-

580

Knorr-Cetina K amp Brugger U (2002) Traders Engagement with Markets A Postsocial

Relationship Theory Culture and Society 19(5-6) 161-185

Labouvie-Vief G (2003) Dynamic integration Affect cognition and the self in adulthood

Current Directions in Psychological Science 12 201-206

Lerner J S amp Keltner D (2001) Fear anger and risk Journal of Personality and Social

Psychology 81(1) 146-159

Lerner J S Small D A amp Loewenstein G (2004) Heart strings and purse strings Carryover

effects of emotions on economic decisions Psychological Science 15(5) 337-341

Lo A Repin D amp Steenbarger B (2005) Fear and greed in financial markets A clinical study

of day traders American Economic Review 95 352-359

Lo A W amp Repin D V (2002) The Psychophysiology of Real-Time Financial Risk

Processing Journal of Cognitive Neuroscience 14 323-339

MacKenzie D (2006) An Engine Not A Camera How Financial Models Shape Markets

Cambridge Mass MIT Press

Mayer JD amp Hanson A (1995) Mood-congruent judgment over time Personality and Social

Psychology Bulletin 21 237-244

Mayer JD DiPaolo M and Salovey P (1990) Perceiving affective content in ambiguous

visual stimuli a component of emotional intelligence Journal of Personality Assessment

54 772-781

Miller G (2003) The cognitive revolution a historical perspective Trends in Cognitive Science

7 141

Muraven M amp Baumeister R F (2000) Self-regulation and depletion of limited resources

Does self-control resemble a muscle Psychological Bulletin 126 247-259

Nicholson N (2000) Managing the Human Animal London ThomsonTexere

34

Peterson R L (2007) Affect and financial decision-making How neuroscience can inform

market participants The Journal of Behavioral Finance 8(2) 70-78

Pham M T (2004) The logic of feeling Journal of Consumer Psychology 14 360-369

Phelps E A (2006) Emotion and cognition Insights from studies of the human amygdala

Annual Review of Psychology 57 27-53

Sayer A (1997) Essentialism social constructionism and beyond The Sociological Review 45

453-487

Shapira Z amp Venezia I (2001) Patterns of behavior of professionally managed and

independent investors Journal of Banking and Finance 25 1573ndash1587

Schunk D amp Betsch C (2006) Explaining the heterogeneity in utility functions by individual

differences in decision modes Journal of Economic Psychology 27 386-401

Schwager J D (1993) Market Wizards Interviews with Top Traders New York Collins

Schwarz N amp Clore G L (1983) Mood misattribution and judgments of well-being

Informative and directive functions of affective states Journal of Personality and Social

Psychology 45 513-523

Seo M G Barrett L F amp Bartunek J M (2004) The role of affective experience in work

motivation Academy of Management Review 29 423-439

Seo M G amp Barrett L F (2007) Being emotional during decision makingmdashgood or bad An

empirical investigation The Academy of Management Journal 50 923-940

Shefrin H (2000) Beyond Greed and Fear Understanding Behavioral Finance and the

Psychology of Investing Boston MA Harvard Business School Press

Stokes A F Kemper K amp Kite K (1997) Aeronautical decision making cue recognition and

expertise under time pressure In C E Zsambok amp G Klein (Eds) Naturalistic Decision

Making pp 183-196 Mahwah NJ Erlbaum

Tamir M (2005) Dont worry be happy Neuroticism trait-consistent affect regulation

and performance Journal of Personality and Social Psychology 89 (3) 449 ndash

461

Thaler R H (1985) Mental accounting and consumer choice Marketing Science 4(3) 199-214

Thaler R H (1993) Advances In Behavioral Finance New York Russel Sage Foundation

Thaler R H (1999) Mental accounting matters Journal of Behavioral Decision Making 12(3)

183-206

Tiedens L amp Linton S (2001) Judgment under emotional certainty and uncertainty the effects

of specific emotions on information processing Journal of Personality and Social

Psychology 81(6) 973-988

Todd P M amp Gigerenzer G (2007) Environments that make us smart Ecological rationality

Current Directions in Psychological Science 16 167-171

Totterdell P Briner R B Parkinson B amp Reynolds S (1996) Fingerprinting time series

dynamic patterns in self-report and performance measures uncovered by a graphical non-

linear method British Journal of Psychology 87(1) 43-60

Weber M amp Welfens F (2008) Splitting the Disposition Effect Asymmetric Reactions

Towards bdquoSelling winners‟ and bdquoHolding Losers‟ Working Paper University of

Mannheim

Wright WF amp Bower GH (1992) Mood effects on subjective probability assessment

Organizational Behavior and Human Decision Processes 52 276ndash91

23

emotional as well as what the analyst thinks as well so you sort of bring the

instruments you have available to you to make the decision rather than the snap

[snaps his finger] I fancy buying thatrdquo 101 high experience high pay

ldquoI may examine opportunities based on intuition that something is going to happen

but the decision is based on something I think is rationalrdquo 68 medium experience

high pay

Reported use of intuition does seem to increase with trader experience However traderslsquo

engagement with their feelings is qualitatively different between low and high performers High

performing traders seem to engage with their intuitions at a meta-cognitive level and make

judgments about the relevance of these feelings to the decision at hand This is consistent with

the growing literature on expertise which points to experience as a necessary but insufficient

condition for the development of expertise and points to the role of extended critical engagement

with practice in developing expertise (Ericsson 2006 Ericsson Krampe amp Tesch-Roemer

1993)

Traders were not universally positive about the role of intuition in market decision making

Some believed reliance on such feelings yields poor outcomes -

ldquoMany traders feel that models have been developed by academics who do not know

markets and [traders] think that gut feeling is more important My experience is that

this is 100 wrong and computers can make better decisions than tradersrdquo 37

medium experience medium pay

Overall however the data support a picture of expert traders having a meta-cognitive

engagement with emotion regulation This process entails discrimination between emotions in

terms of their relevance to the decision at hand and effective strategies for emotion regulation to

enhance performance

24

Empathy

The third identified theme was empathy monitoring own emotions as information

about what other market players might be feeling Only five traders explicitly described

using their own capacity for empathy as a decision making tool Although not frequent in

our data these examples are important illustrating that there is a path for traders beyond

simply seeking to eliminate or reduce the intensity of their emotions These traders

fostered feelings as a source of information about other market actors which they managed

and used in a self-aware analysis One trader described using his own fear as an indicator

of fear in the market Another described actively imagining the feelings of other market

actors ―trying to put myself in [the Bank of England Governorlsquos] feet to develop a feel for

how he feels and thinks 14 high experience high pay

Three traders talked about an emotional affinity with the feelings of people in

national markets (Spain 34 high experience medium pay Italy 70 medium experience

low pay and Japan 117 high experience medium pay) with whom they shared a common

culture and propensity to react emotionally in similar ways to the same market events This

group was small but these data broaden the picture of traders reasoning with emotionlsquo

and offer a potentially rich and fruitful avenue for future research

DISCUSSION AND CONCLUSIONS

To ask whether emotion disturbs or aids traderslsquo decision-making is to ask the wrong

question Traderslsquo emotions and cognition are inextricably linked Therefore a more productive

question to ask in this context is whether there are more or less effective strategies for managing

and using emotion in financial decision-making This has been the thrust of our analysis which

25

sought to move beyond previous work that simply characterizes emotional arousal as detrimental

to performance (eg Lo et al 2005 Schunk and Bersh 2006) The study contributes to our

understanding of the role of emotions in work and decision-making in several distinct ways In

contributing to our understanding of the role of emotion at work this study has particular

relevance in that it considers a work domain which has been theorized as strongly normatively

rational as opposed to a work domain (such as negotiation or customer service) where

performance is primarily dependent on effective social interaction However it is clear from this

study that even within such an analysis-intensive domain as financial trading emotion plays a

central role Traders and their managers are frequently preoccupied with the effective regulation

and use of emotions in their work Our work points to the value of a more nuanced understanding

which considers the role of emotions in decision-making the differential impact of various

emotion regulation strategies the conditions under which gut-feellsquo may support effective

decision-making and the role of empathic responses in understanding the behavior of other

market actors

Effective emotion regulation seems to be a critical success factor in trading for our

findings suggest that the strategies for emotion regulation adopted by expert higher performing

traders are qualitatively different from those of lower performing traders In particular higher

performers are more inclined to regulate emotions through attentional deployment and cognitive

change and may display a willingness to cope with negative feelings in the interests of

maintaining objectivity and pursuing longer term goals The kind of attention and appraisal-

focused emotion regulation strategies used by high-performing traders do not seem to be too

cognitively expensive and are effective in reducing negative experience of emotion (Gross

2002) By contrast less expert traders engage either in avoidant behaviors such as walking

away from the desk or invest significant cognitive effort in modulating their emotional

26

responses This extends previous findings (eg Grandey 2003) concerning the performance

benefits of antecedent versus response-focused emotion regulation in the context of emotion

labor to the very different context of financial decision-making Our findings also suggest that

willingness to endure negative feelings in pursuit of long-term goals may be more adaptive than

purely defensive strategies aimed at maintaining positive feelings (Labouvie-Vief 2003 Tamir

2005)

This study also provides evidence that more effective emotion regulation strategies can be

learned in a financial decision-making context While an individuallsquos preferred approach to

emotion regulation is likely to be influenced by personality traits neuroticism and extroversion in

particular (Gross amp John 2003) our interviews with traders and their managers also point to the

importance of traderslsquo learned strategies for emotion regulation Importantly our study also

suggests that defensive emotion regulation strategies may be problematic because they reduce

opportunities to exercise expert intuition

These findings go well beyond prior research on emotion regulation and performance

(eg Grandey 2003) which has a primary focus on performance in the context of interpersonal

interaction Our findings uniquely address the performance of professional traders for whom

performance is not primarily dependent on interpersonal interaction and which has been

theorized as strongly rational involving the selection of optimal strategies in the face of complex

cognitive demands and requiring attention to a large volume of information with uncertain

relevance

Turning to intuition traders in our study mirror the balance of opinion in the research

literature on intuition They are equivocal about whether feelings and hunches about appropriate

courses of action lead to better or worse outcomes than purely rational analysis There were

strong feelings on both sides with traders being quite evenly divided between the two camps

27

However again our study suggests the importance of a more nuanced approach than simply

asking whether reliance on intuition is good or bad and points towards the conditions in which

reliance on intuitive judgment may be more and less effective The findings suggest that one

characteristic of higher performing traders may be a greater willingness to reflect critically about

their intuitions and feelings about trading These traders often reported relying on intuition but

they tend to weigh their feelings critically alongside other evidence and to reflect about the

provenance of those feelings Lower performing traders may rely on feelings alone and show

less propensity to think critically about the source of hunches This reflection by expert traders

about the provenance of feelings may be particularly salient given Schwarz and Clorelsquos (1983

2003) finding that the impact of emotions on behavior is reduced or disappears when the

relevance of those emotions is explicitly called into question

That traderslsquo reliance on affective cues in decision-making can support effective

performance is consistent with Damasiolsquos observation that deciding advantageously depends on

the use of affective cues in both learning and deciding (Bechara et al 1997 Damasio 1994)

There is increasing evidence that humans are naturally proficient in the ability to acquire

expertise and that encapsulation of experience in expert intuition and perception via system one

provides a means of by-passing cognitive limits (Ericsson 2006) The nature of expertise could

counteract the inherent environmental uncertainties that Tiedens and Linton (2001) identified as

leading to more conscious appraisal of information While not an unequivocal result our finding

of greater critical engagement among higher performing traders with intuitions and their more

sophisticated deployment of intuition in combination with analysis suggests an important

direction for future research

The small number of accounts of traders monitoring their own emotions as a source of

information about the emotions of other market actors was intriguing These data suggest a

28

possibly productive avenue for future research We do not have evidence of performance

outcomes of predictive uses of empathy in this manner but our findings are consistent with

arguments that the evolution of the human brain has been significantly driven by the need to

predict the behavior of other humans often via subtle cues (eg Nicholson 2000)

We suggest that the identification of links between decision-making performance and

emotion regulation in this study has important implications for theory development in two key

fields First while somewhat tacit in much of the literature the implication of many claims in the

decision-making and behavioral finance literatures is that a range of key decision-making biases

are underpinned by mechanisms which involve emotion processes One relevant explicit example

is Thalerlsquos (1985 1999) account of the role of hedonic editinglsquo in mental accounting and the

disposition effect (the tendency to hold losing assets longer than winning assets) This explains

key biases in terms of the desire to maintain positive hedonic tone There is evidence too of

interpersonal variation in propensity to exhibit such biases for example investors vary in their

propensity to exhibit the disposition effect (Shapira amp Venezia 2001 Weber amp Welfens 2008)

In this study we have seen that traders seek to regulate emotions in order to avoid decision biases

and that higher performing traders typically exhibit more sophisticated emotion regulation

strategies This suggests that it would be productive to investigate the role of emotion regulation

as one key source of interpersonal variation in susceptibility to a range of decision biases

A second implication concerns the role of emotion in expert performance While much

attention has been paid to the nature of cognition in expert performance the expertise literature

hardly considers the role of emotion For example examining the index of the Cambridge

Handbook of Expertise and Expert Performance (Ericsson et al 2006) reveals very few

references to emotion and these are peripheral to the main arguments of the chapters which

contain them Our research suggests first that effective emotion regulation may be an important

29

facet of expert performance and second that greater attention should be paid to the interactions

between emotion emotion regulation and expert intuition Further research could test the

proposition that effective expert intuition is reduced by reliance on defensive emotion regulation

strategies

While our study points to the importance of intuition in traderslsquo work it may be that the

relative importance of intuition and analysis vary with task characteristics such as time span of

decision-making Certainly this seemed to be the view of several senior managers with

responsibility for allocating traders to trading roles The interplay that expert traders described

between intuition and analysis is also intriguing The importance of context to the role of affect

in decision-making has been noted in prior research (Forgas amp George 2001) Further research

could usefully explore this aspect of traderslsquo expertise

This study also contains some potentially important implications for practice First it

points to the importance of learned strategies for emotion regulation and the need for effective

support for their development Second our data directly and indirectly point to the key role of

management in this process Our findings suggest that there may be considerable benefits to

skilled managerial interventions that help to steer effective emotion regulation and support

inexperienced traders in developing emotion regulation skills Additionally managers may be

able to help traders to understand the productive role that critically engaged experience-based

intuition may play in decision-making Our evidence suggests that many high performing traders

deploy a reflective and critical approach to the use and development of intuition well-founded in

experience Managers could help to guide this process through coaching The contextual

dependence of high quality intuitions suggests they are quite domain specific and may not

transfer across contexts As several informants told us this is especially true for traders operating

under different market conditions

30

We heard repeated concerns from senior managers who worried about traders who had

not seen a bear market and would not operate well when that occurred We also heard many

stories of people transferring between trading areas and needing time to re-contextualize

expertise before their intuitions could be considered reliable Thus managers have a role in

helping traders to extend the boundaries of their expertise Given recent events in financial

markets our findings may be relevant to an understanding of how traders react under massively

changed trading conditions and how those reactions might either contribute to or result from

market volatility

This research has some important limitations First although we have argued for the

importance of an account of emotion that includes the experience of emotion as Pham (2004

368) notes the affective system is focused on the present Thus people can be poor at recalling or

predicting emotions There are limits to the human capacity to introspect on emotion processes

and to recall the experience of emotion These limits are also subject to wide individual

differences The capacity for introspection and recall will also vary between individuals For this

reason studies such as ours need to be complemented with more physiologically based research

as well as further qualitative and quantitative studies

Second as in all work contexts traders subscribe to norms of socially sanctioned

behavior and to common narratives about the nature of their work We have not treated emotional

labor as a primary component of traderslsquo work and performance The majority of work

interactions are carried out through highly abbreviated electronic exchanges which provide a poor

medium for the communication of emotion However there is a sense in which traders engage in

emotional labor since especially for novices there are social pressures to comply with display

rules which emphasize the avoidance of displays of strong emotion One common narrative

thread that ran though many traderslsquo accounts of their work was a representation of trading work

31

as principally concerned with rational analysis from which emotions are a dangerous distraction

This narrative seemed particularly strong in the accounts of less experienced traders Although as

we have seen the mask would often slip as they discussed their work Some traderslsquo accounts

were clearly colored by a desire to conform to this mode of self-presentation In consequence it is

possible that in our interviews and during data analysis we were at times unable to distinguish

effectively between defensive denial of emotion and effective regulation of emotion This would

be another avenue for future research

To conclude we know that emotions are a rich source of experience in everyday life but

at the same time in work contexts they can be a source of vulnerability a wayward influence over

judgment and a source of disturbance to process The more ―rational-economic such

environments are the more likely we are to hold such beliefs (Nicholson 2000) Our research

illustrates that this position is false or at best short-sighted In the hyper-rational world of

trading in financial markets we did find some evidence that emotions disturbed performance but

mostly among the inexperienced and un-reflective traders The best traders are able to regulate

emotions effectively and incorporate relevant emotions as information ndash signals or a kind of

radar that contain information about risks what is going on in the minds of others and the weight

and relevance to be accorded to onelsquos own past experience

32

REFERENCES

Bargh J A Chen M amp Burrows L (1996) Automaticity of social behavior Direct effects of

trait construct and stereotype activation on action Journal of Personality and Social

Psychology 71 230-244

Baumeister R F Bratslavsky E Muraven M amp Tice D M (1998) Ego depletion Is the

active self a limited resource Journal of Personality and Social Psychology 74 1252-

1265

Bechara A Damasio A Tranel D amp Damasio A R (1997) Deciding advantageously before

knowing the advantageous strategy Science 275 1293-1295

Bower G H (1981) Mood and memory American Psychologist 36 129 ndash 148

Bower G H (1991) Mood congruity of social judgments In J P Forgas (Ed) Emotion and

social judgments (pp 31ndash53) Oxford Pergamon Press

Braun V amp Clarke V (2006) Using thematic analysis in psychology Qualitative Research in

Psychology 3(2) 77-101

Buck R (1999) The biological affects a typology Psychological Reveiw 106 301-336

Damasio A R (1994) Descartes‟ error Emotion reason and the human brain New York

Putnam

Dane E amp Pratt M G (2007) Exploring intuition and its role in managerial decision making

The Academy of Management Review 32 33-54

De Bondt W Palm F amp Wolff C (2004) Introduction to the special issue on behavioral

finance Journal of Empirical Finance 11 423-427

Dreyfus H amp Dreyfus S (2005) Expertise in real world contexts Organization Studies 26

779-792

Epstein S Pacini R Denes-Raj V amp Heier H (1996) Individual differences in intuitive-

experiential and analytical-rational thinking styles Journal of Personality and Social

Psychology 71 390-405

Ericsson K A Krampe R T amp Tesch-Roemer C (1993) The role of deliberate practice in the

acquisition of expert performance Psychological Review 100 363-406

Ericsson K A (2006) An introduction to the Cambridge Handbook of Expertise and Expert

Performance its development organization and content In K A Ericsson amp N Charness

amp P J Feltovich amp R R Hoffman (Eds) The Cambridge Handbook of Expertise and

Expert Performance 1st ed 3-20 Cambridge Cambridge University Press

Fama E F (1991) Efficient Capital Markets II The Journal of Finance 46 1575-1617

Fama E F (1998) Market efficiency long-term returns and behavioral finance Journal of

Financial Economics Vol 49 283-306

Fenton-OCreevy M Nicholson N Soane E amp Willman P (2005) Traders Risks Decisions

and Management in Financial Markets Oxford Oxford University Press

Finucane M L Alhakami A Slovic P amp Johnson S M (2000) The affect heuristic in

judgments of risks and benefits Journal of Behavioral Decision Making 13(1) 1-17

Forgas JP amp George JM (2001) Affective influences on judgments and behavior in

organizations An information processing perspective Organizational Behavior and

Human Decision Processes 86(1) 3-34

Grandey AA (2000) Emotion Regulation in the Workplace A new way to conceptualize

Emotional Labor Journal of Occupational Health Psychology 5(1) 95-110

33

Grandey A A (2003) When the show must go on surface acting and deep acting as

determinants of emotional exhaustion and peer-rated service delivery Academy of

Management Journal 46 86-96

Gray JA (1999) Cognition emotion conscious experience and the brain In T Dalgleish and

MJ Power (Eds) Handbook of Cognition and Emotion (pp83-102) Chichester England

Wiley

Gross J (2002) Emotion regulation affective cognitive and social consequences

Psychophysiology 39 281

Gross J J amp John O P (2003) Individual differences in two emotion regulation processes

Implications for affect relationships and well-being Journal of Personality and Social

Psychology 85(2) 348-362

Gross J J amp Thompson R A (2007) Emotion regulation Conceptual foundations In J J

Gross (Ed) Handbook of emotion regulation New York NY Guilford Press

Isen A M Shalker T E Clark M amp Karp L (1978) Affect accessibility of material in

memory and behavior A cognitive loop Journal of Personality and Social Psychology

36 1-12

Johnson E amp Tversky A (1983) Affect generalization and the perception of risk Journal of

Personality and Social Psychology 45(1) 20-31

Kavanaugh D amp Bower G (1985) Mood and self-efficacy Impact of job and sadness on

perceived capabilities Cognitive Therapy and Research 9 507-525

Klein G A Calderwood R amp Clinton Cirocco A (1986) Rapid decision-making on the

fireground Human Factors and Ergonomics Society 30th Annual Meeting Vol 1 576-

580

Knorr-Cetina K amp Brugger U (2002) Traders Engagement with Markets A Postsocial

Relationship Theory Culture and Society 19(5-6) 161-185

Labouvie-Vief G (2003) Dynamic integration Affect cognition and the self in adulthood

Current Directions in Psychological Science 12 201-206

Lerner J S amp Keltner D (2001) Fear anger and risk Journal of Personality and Social

Psychology 81(1) 146-159

Lerner J S Small D A amp Loewenstein G (2004) Heart strings and purse strings Carryover

effects of emotions on economic decisions Psychological Science 15(5) 337-341

Lo A Repin D amp Steenbarger B (2005) Fear and greed in financial markets A clinical study

of day traders American Economic Review 95 352-359

Lo A W amp Repin D V (2002) The Psychophysiology of Real-Time Financial Risk

Processing Journal of Cognitive Neuroscience 14 323-339

MacKenzie D (2006) An Engine Not A Camera How Financial Models Shape Markets

Cambridge Mass MIT Press

Mayer JD amp Hanson A (1995) Mood-congruent judgment over time Personality and Social

Psychology Bulletin 21 237-244

Mayer JD DiPaolo M and Salovey P (1990) Perceiving affective content in ambiguous

visual stimuli a component of emotional intelligence Journal of Personality Assessment

54 772-781

Miller G (2003) The cognitive revolution a historical perspective Trends in Cognitive Science

7 141

Muraven M amp Baumeister R F (2000) Self-regulation and depletion of limited resources

Does self-control resemble a muscle Psychological Bulletin 126 247-259

Nicholson N (2000) Managing the Human Animal London ThomsonTexere

34

Peterson R L (2007) Affect and financial decision-making How neuroscience can inform

market participants The Journal of Behavioral Finance 8(2) 70-78

Pham M T (2004) The logic of feeling Journal of Consumer Psychology 14 360-369

Phelps E A (2006) Emotion and cognition Insights from studies of the human amygdala

Annual Review of Psychology 57 27-53

Sayer A (1997) Essentialism social constructionism and beyond The Sociological Review 45

453-487

Shapira Z amp Venezia I (2001) Patterns of behavior of professionally managed and

independent investors Journal of Banking and Finance 25 1573ndash1587

Schunk D amp Betsch C (2006) Explaining the heterogeneity in utility functions by individual

differences in decision modes Journal of Economic Psychology 27 386-401

Schwager J D (1993) Market Wizards Interviews with Top Traders New York Collins

Schwarz N amp Clore G L (1983) Mood misattribution and judgments of well-being

Informative and directive functions of affective states Journal of Personality and Social

Psychology 45 513-523

Seo M G Barrett L F amp Bartunek J M (2004) The role of affective experience in work

motivation Academy of Management Review 29 423-439

Seo M G amp Barrett L F (2007) Being emotional during decision makingmdashgood or bad An

empirical investigation The Academy of Management Journal 50 923-940

Shefrin H (2000) Beyond Greed and Fear Understanding Behavioral Finance and the

Psychology of Investing Boston MA Harvard Business School Press

Stokes A F Kemper K amp Kite K (1997) Aeronautical decision making cue recognition and

expertise under time pressure In C E Zsambok amp G Klein (Eds) Naturalistic Decision

Making pp 183-196 Mahwah NJ Erlbaum

Tamir M (2005) Dont worry be happy Neuroticism trait-consistent affect regulation

and performance Journal of Personality and Social Psychology 89 (3) 449 ndash

461

Thaler R H (1985) Mental accounting and consumer choice Marketing Science 4(3) 199-214

Thaler R H (1993) Advances In Behavioral Finance New York Russel Sage Foundation

Thaler R H (1999) Mental accounting matters Journal of Behavioral Decision Making 12(3)

183-206

Tiedens L amp Linton S (2001) Judgment under emotional certainty and uncertainty the effects

of specific emotions on information processing Journal of Personality and Social

Psychology 81(6) 973-988

Todd P M amp Gigerenzer G (2007) Environments that make us smart Ecological rationality

Current Directions in Psychological Science 16 167-171

Totterdell P Briner R B Parkinson B amp Reynolds S (1996) Fingerprinting time series

dynamic patterns in self-report and performance measures uncovered by a graphical non-

linear method British Journal of Psychology 87(1) 43-60

Weber M amp Welfens F (2008) Splitting the Disposition Effect Asymmetric Reactions

Towards bdquoSelling winners‟ and bdquoHolding Losers‟ Working Paper University of

Mannheim

Wright WF amp Bower GH (1992) Mood effects on subjective probability assessment

Organizational Behavior and Human Decision Processes 52 276ndash91

24

Empathy

The third identified theme was empathy monitoring own emotions as information

about what other market players might be feeling Only five traders explicitly described

using their own capacity for empathy as a decision making tool Although not frequent in

our data these examples are important illustrating that there is a path for traders beyond

simply seeking to eliminate or reduce the intensity of their emotions These traders

fostered feelings as a source of information about other market actors which they managed

and used in a self-aware analysis One trader described using his own fear as an indicator

of fear in the market Another described actively imagining the feelings of other market

actors ―trying to put myself in [the Bank of England Governorlsquos] feet to develop a feel for

how he feels and thinks 14 high experience high pay

Three traders talked about an emotional affinity with the feelings of people in

national markets (Spain 34 high experience medium pay Italy 70 medium experience

low pay and Japan 117 high experience medium pay) with whom they shared a common

culture and propensity to react emotionally in similar ways to the same market events This

group was small but these data broaden the picture of traders reasoning with emotionlsquo

and offer a potentially rich and fruitful avenue for future research

DISCUSSION AND CONCLUSIONS

To ask whether emotion disturbs or aids traderslsquo decision-making is to ask the wrong

question Traderslsquo emotions and cognition are inextricably linked Therefore a more productive

question to ask in this context is whether there are more or less effective strategies for managing

and using emotion in financial decision-making This has been the thrust of our analysis which

25

sought to move beyond previous work that simply characterizes emotional arousal as detrimental

to performance (eg Lo et al 2005 Schunk and Bersh 2006) The study contributes to our

understanding of the role of emotions in work and decision-making in several distinct ways In

contributing to our understanding of the role of emotion at work this study has particular

relevance in that it considers a work domain which has been theorized as strongly normatively

rational as opposed to a work domain (such as negotiation or customer service) where

performance is primarily dependent on effective social interaction However it is clear from this

study that even within such an analysis-intensive domain as financial trading emotion plays a

central role Traders and their managers are frequently preoccupied with the effective regulation

and use of emotions in their work Our work points to the value of a more nuanced understanding

which considers the role of emotions in decision-making the differential impact of various

emotion regulation strategies the conditions under which gut-feellsquo may support effective

decision-making and the role of empathic responses in understanding the behavior of other

market actors

Effective emotion regulation seems to be a critical success factor in trading for our

findings suggest that the strategies for emotion regulation adopted by expert higher performing

traders are qualitatively different from those of lower performing traders In particular higher

performers are more inclined to regulate emotions through attentional deployment and cognitive

change and may display a willingness to cope with negative feelings in the interests of

maintaining objectivity and pursuing longer term goals The kind of attention and appraisal-

focused emotion regulation strategies used by high-performing traders do not seem to be too

cognitively expensive and are effective in reducing negative experience of emotion (Gross

2002) By contrast less expert traders engage either in avoidant behaviors such as walking

away from the desk or invest significant cognitive effort in modulating their emotional

26

responses This extends previous findings (eg Grandey 2003) concerning the performance

benefits of antecedent versus response-focused emotion regulation in the context of emotion

labor to the very different context of financial decision-making Our findings also suggest that

willingness to endure negative feelings in pursuit of long-term goals may be more adaptive than

purely defensive strategies aimed at maintaining positive feelings (Labouvie-Vief 2003 Tamir

2005)

This study also provides evidence that more effective emotion regulation strategies can be

learned in a financial decision-making context While an individuallsquos preferred approach to

emotion regulation is likely to be influenced by personality traits neuroticism and extroversion in

particular (Gross amp John 2003) our interviews with traders and their managers also point to the

importance of traderslsquo learned strategies for emotion regulation Importantly our study also

suggests that defensive emotion regulation strategies may be problematic because they reduce

opportunities to exercise expert intuition

These findings go well beyond prior research on emotion regulation and performance

(eg Grandey 2003) which has a primary focus on performance in the context of interpersonal

interaction Our findings uniquely address the performance of professional traders for whom

performance is not primarily dependent on interpersonal interaction and which has been

theorized as strongly rational involving the selection of optimal strategies in the face of complex

cognitive demands and requiring attention to a large volume of information with uncertain

relevance

Turning to intuition traders in our study mirror the balance of opinion in the research

literature on intuition They are equivocal about whether feelings and hunches about appropriate

courses of action lead to better or worse outcomes than purely rational analysis There were

strong feelings on both sides with traders being quite evenly divided between the two camps

27

However again our study suggests the importance of a more nuanced approach than simply

asking whether reliance on intuition is good or bad and points towards the conditions in which

reliance on intuitive judgment may be more and less effective The findings suggest that one

characteristic of higher performing traders may be a greater willingness to reflect critically about

their intuitions and feelings about trading These traders often reported relying on intuition but

they tend to weigh their feelings critically alongside other evidence and to reflect about the

provenance of those feelings Lower performing traders may rely on feelings alone and show

less propensity to think critically about the source of hunches This reflection by expert traders

about the provenance of feelings may be particularly salient given Schwarz and Clorelsquos (1983

2003) finding that the impact of emotions on behavior is reduced or disappears when the

relevance of those emotions is explicitly called into question

That traderslsquo reliance on affective cues in decision-making can support effective

performance is consistent with Damasiolsquos observation that deciding advantageously depends on

the use of affective cues in both learning and deciding (Bechara et al 1997 Damasio 1994)

There is increasing evidence that humans are naturally proficient in the ability to acquire

expertise and that encapsulation of experience in expert intuition and perception via system one

provides a means of by-passing cognitive limits (Ericsson 2006) The nature of expertise could

counteract the inherent environmental uncertainties that Tiedens and Linton (2001) identified as

leading to more conscious appraisal of information While not an unequivocal result our finding

of greater critical engagement among higher performing traders with intuitions and their more

sophisticated deployment of intuition in combination with analysis suggests an important

direction for future research

The small number of accounts of traders monitoring their own emotions as a source of

information about the emotions of other market actors was intriguing These data suggest a

28

possibly productive avenue for future research We do not have evidence of performance

outcomes of predictive uses of empathy in this manner but our findings are consistent with

arguments that the evolution of the human brain has been significantly driven by the need to

predict the behavior of other humans often via subtle cues (eg Nicholson 2000)

We suggest that the identification of links between decision-making performance and

emotion regulation in this study has important implications for theory development in two key

fields First while somewhat tacit in much of the literature the implication of many claims in the

decision-making and behavioral finance literatures is that a range of key decision-making biases

are underpinned by mechanisms which involve emotion processes One relevant explicit example

is Thalerlsquos (1985 1999) account of the role of hedonic editinglsquo in mental accounting and the

disposition effect (the tendency to hold losing assets longer than winning assets) This explains

key biases in terms of the desire to maintain positive hedonic tone There is evidence too of

interpersonal variation in propensity to exhibit such biases for example investors vary in their

propensity to exhibit the disposition effect (Shapira amp Venezia 2001 Weber amp Welfens 2008)

In this study we have seen that traders seek to regulate emotions in order to avoid decision biases

and that higher performing traders typically exhibit more sophisticated emotion regulation

strategies This suggests that it would be productive to investigate the role of emotion regulation

as one key source of interpersonal variation in susceptibility to a range of decision biases

A second implication concerns the role of emotion in expert performance While much

attention has been paid to the nature of cognition in expert performance the expertise literature

hardly considers the role of emotion For example examining the index of the Cambridge

Handbook of Expertise and Expert Performance (Ericsson et al 2006) reveals very few

references to emotion and these are peripheral to the main arguments of the chapters which

contain them Our research suggests first that effective emotion regulation may be an important

29

facet of expert performance and second that greater attention should be paid to the interactions

between emotion emotion regulation and expert intuition Further research could test the

proposition that effective expert intuition is reduced by reliance on defensive emotion regulation

strategies

While our study points to the importance of intuition in traderslsquo work it may be that the

relative importance of intuition and analysis vary with task characteristics such as time span of

decision-making Certainly this seemed to be the view of several senior managers with

responsibility for allocating traders to trading roles The interplay that expert traders described

between intuition and analysis is also intriguing The importance of context to the role of affect

in decision-making has been noted in prior research (Forgas amp George 2001) Further research

could usefully explore this aspect of traderslsquo expertise

This study also contains some potentially important implications for practice First it

points to the importance of learned strategies for emotion regulation and the need for effective

support for their development Second our data directly and indirectly point to the key role of

management in this process Our findings suggest that there may be considerable benefits to

skilled managerial interventions that help to steer effective emotion regulation and support

inexperienced traders in developing emotion regulation skills Additionally managers may be

able to help traders to understand the productive role that critically engaged experience-based

intuition may play in decision-making Our evidence suggests that many high performing traders

deploy a reflective and critical approach to the use and development of intuition well-founded in

experience Managers could help to guide this process through coaching The contextual

dependence of high quality intuitions suggests they are quite domain specific and may not

transfer across contexts As several informants told us this is especially true for traders operating

under different market conditions

30

We heard repeated concerns from senior managers who worried about traders who had

not seen a bear market and would not operate well when that occurred We also heard many

stories of people transferring between trading areas and needing time to re-contextualize

expertise before their intuitions could be considered reliable Thus managers have a role in

helping traders to extend the boundaries of their expertise Given recent events in financial

markets our findings may be relevant to an understanding of how traders react under massively

changed trading conditions and how those reactions might either contribute to or result from

market volatility

This research has some important limitations First although we have argued for the

importance of an account of emotion that includes the experience of emotion as Pham (2004

368) notes the affective system is focused on the present Thus people can be poor at recalling or

predicting emotions There are limits to the human capacity to introspect on emotion processes

and to recall the experience of emotion These limits are also subject to wide individual

differences The capacity for introspection and recall will also vary between individuals For this

reason studies such as ours need to be complemented with more physiologically based research

as well as further qualitative and quantitative studies

Second as in all work contexts traders subscribe to norms of socially sanctioned

behavior and to common narratives about the nature of their work We have not treated emotional

labor as a primary component of traderslsquo work and performance The majority of work

interactions are carried out through highly abbreviated electronic exchanges which provide a poor

medium for the communication of emotion However there is a sense in which traders engage in

emotional labor since especially for novices there are social pressures to comply with display

rules which emphasize the avoidance of displays of strong emotion One common narrative

thread that ran though many traderslsquo accounts of their work was a representation of trading work

31

as principally concerned with rational analysis from which emotions are a dangerous distraction

This narrative seemed particularly strong in the accounts of less experienced traders Although as

we have seen the mask would often slip as they discussed their work Some traderslsquo accounts

were clearly colored by a desire to conform to this mode of self-presentation In consequence it is

possible that in our interviews and during data analysis we were at times unable to distinguish

effectively between defensive denial of emotion and effective regulation of emotion This would

be another avenue for future research

To conclude we know that emotions are a rich source of experience in everyday life but

at the same time in work contexts they can be a source of vulnerability a wayward influence over

judgment and a source of disturbance to process The more ―rational-economic such

environments are the more likely we are to hold such beliefs (Nicholson 2000) Our research

illustrates that this position is false or at best short-sighted In the hyper-rational world of

trading in financial markets we did find some evidence that emotions disturbed performance but

mostly among the inexperienced and un-reflective traders The best traders are able to regulate

emotions effectively and incorporate relevant emotions as information ndash signals or a kind of

radar that contain information about risks what is going on in the minds of others and the weight

and relevance to be accorded to onelsquos own past experience

32

REFERENCES

Bargh J A Chen M amp Burrows L (1996) Automaticity of social behavior Direct effects of

trait construct and stereotype activation on action Journal of Personality and Social

Psychology 71 230-244

Baumeister R F Bratslavsky E Muraven M amp Tice D M (1998) Ego depletion Is the

active self a limited resource Journal of Personality and Social Psychology 74 1252-

1265

Bechara A Damasio A Tranel D amp Damasio A R (1997) Deciding advantageously before

knowing the advantageous strategy Science 275 1293-1295

Bower G H (1981) Mood and memory American Psychologist 36 129 ndash 148

Bower G H (1991) Mood congruity of social judgments In J P Forgas (Ed) Emotion and

social judgments (pp 31ndash53) Oxford Pergamon Press

Braun V amp Clarke V (2006) Using thematic analysis in psychology Qualitative Research in

Psychology 3(2) 77-101

Buck R (1999) The biological affects a typology Psychological Reveiw 106 301-336

Damasio A R (1994) Descartes‟ error Emotion reason and the human brain New York

Putnam

Dane E amp Pratt M G (2007) Exploring intuition and its role in managerial decision making

The Academy of Management Review 32 33-54

De Bondt W Palm F amp Wolff C (2004) Introduction to the special issue on behavioral

finance Journal of Empirical Finance 11 423-427

Dreyfus H amp Dreyfus S (2005) Expertise in real world contexts Organization Studies 26

779-792

Epstein S Pacini R Denes-Raj V amp Heier H (1996) Individual differences in intuitive-

experiential and analytical-rational thinking styles Journal of Personality and Social

Psychology 71 390-405

Ericsson K A Krampe R T amp Tesch-Roemer C (1993) The role of deliberate practice in the

acquisition of expert performance Psychological Review 100 363-406

Ericsson K A (2006) An introduction to the Cambridge Handbook of Expertise and Expert

Performance its development organization and content In K A Ericsson amp N Charness

amp P J Feltovich amp R R Hoffman (Eds) The Cambridge Handbook of Expertise and

Expert Performance 1st ed 3-20 Cambridge Cambridge University Press

Fama E F (1991) Efficient Capital Markets II The Journal of Finance 46 1575-1617

Fama E F (1998) Market efficiency long-term returns and behavioral finance Journal of

Financial Economics Vol 49 283-306

Fenton-OCreevy M Nicholson N Soane E amp Willman P (2005) Traders Risks Decisions

and Management in Financial Markets Oxford Oxford University Press

Finucane M L Alhakami A Slovic P amp Johnson S M (2000) The affect heuristic in

judgments of risks and benefits Journal of Behavioral Decision Making 13(1) 1-17

Forgas JP amp George JM (2001) Affective influences on judgments and behavior in

organizations An information processing perspective Organizational Behavior and

Human Decision Processes 86(1) 3-34

Grandey AA (2000) Emotion Regulation in the Workplace A new way to conceptualize

Emotional Labor Journal of Occupational Health Psychology 5(1) 95-110

33

Grandey A A (2003) When the show must go on surface acting and deep acting as

determinants of emotional exhaustion and peer-rated service delivery Academy of

Management Journal 46 86-96

Gray JA (1999) Cognition emotion conscious experience and the brain In T Dalgleish and

MJ Power (Eds) Handbook of Cognition and Emotion (pp83-102) Chichester England

Wiley

Gross J (2002) Emotion regulation affective cognitive and social consequences

Psychophysiology 39 281

Gross J J amp John O P (2003) Individual differences in two emotion regulation processes

Implications for affect relationships and well-being Journal of Personality and Social

Psychology 85(2) 348-362

Gross J J amp Thompson R A (2007) Emotion regulation Conceptual foundations In J J

Gross (Ed) Handbook of emotion regulation New York NY Guilford Press

Isen A M Shalker T E Clark M amp Karp L (1978) Affect accessibility of material in

memory and behavior A cognitive loop Journal of Personality and Social Psychology

36 1-12

Johnson E amp Tversky A (1983) Affect generalization and the perception of risk Journal of

Personality and Social Psychology 45(1) 20-31

Kavanaugh D amp Bower G (1985) Mood and self-efficacy Impact of job and sadness on

perceived capabilities Cognitive Therapy and Research 9 507-525

Klein G A Calderwood R amp Clinton Cirocco A (1986) Rapid decision-making on the

fireground Human Factors and Ergonomics Society 30th Annual Meeting Vol 1 576-

580

Knorr-Cetina K amp Brugger U (2002) Traders Engagement with Markets A Postsocial

Relationship Theory Culture and Society 19(5-6) 161-185

Labouvie-Vief G (2003) Dynamic integration Affect cognition and the self in adulthood

Current Directions in Psychological Science 12 201-206

Lerner J S amp Keltner D (2001) Fear anger and risk Journal of Personality and Social

Psychology 81(1) 146-159

Lerner J S Small D A amp Loewenstein G (2004) Heart strings and purse strings Carryover

effects of emotions on economic decisions Psychological Science 15(5) 337-341

Lo A Repin D amp Steenbarger B (2005) Fear and greed in financial markets A clinical study

of day traders American Economic Review 95 352-359

Lo A W amp Repin D V (2002) The Psychophysiology of Real-Time Financial Risk

Processing Journal of Cognitive Neuroscience 14 323-339

MacKenzie D (2006) An Engine Not A Camera How Financial Models Shape Markets

Cambridge Mass MIT Press

Mayer JD amp Hanson A (1995) Mood-congruent judgment over time Personality and Social

Psychology Bulletin 21 237-244

Mayer JD DiPaolo M and Salovey P (1990) Perceiving affective content in ambiguous

visual stimuli a component of emotional intelligence Journal of Personality Assessment

54 772-781

Miller G (2003) The cognitive revolution a historical perspective Trends in Cognitive Science

7 141

Muraven M amp Baumeister R F (2000) Self-regulation and depletion of limited resources

Does self-control resemble a muscle Psychological Bulletin 126 247-259

Nicholson N (2000) Managing the Human Animal London ThomsonTexere

34

Peterson R L (2007) Affect and financial decision-making How neuroscience can inform

market participants The Journal of Behavioral Finance 8(2) 70-78

Pham M T (2004) The logic of feeling Journal of Consumer Psychology 14 360-369

Phelps E A (2006) Emotion and cognition Insights from studies of the human amygdala

Annual Review of Psychology 57 27-53

Sayer A (1997) Essentialism social constructionism and beyond The Sociological Review 45

453-487

Shapira Z amp Venezia I (2001) Patterns of behavior of professionally managed and

independent investors Journal of Banking and Finance 25 1573ndash1587

Schunk D amp Betsch C (2006) Explaining the heterogeneity in utility functions by individual

differences in decision modes Journal of Economic Psychology 27 386-401

Schwager J D (1993) Market Wizards Interviews with Top Traders New York Collins

Schwarz N amp Clore G L (1983) Mood misattribution and judgments of well-being

Informative and directive functions of affective states Journal of Personality and Social

Psychology 45 513-523

Seo M G Barrett L F amp Bartunek J M (2004) The role of affective experience in work

motivation Academy of Management Review 29 423-439

Seo M G amp Barrett L F (2007) Being emotional during decision makingmdashgood or bad An

empirical investigation The Academy of Management Journal 50 923-940

Shefrin H (2000) Beyond Greed and Fear Understanding Behavioral Finance and the

Psychology of Investing Boston MA Harvard Business School Press

Stokes A F Kemper K amp Kite K (1997) Aeronautical decision making cue recognition and

expertise under time pressure In C E Zsambok amp G Klein (Eds) Naturalistic Decision

Making pp 183-196 Mahwah NJ Erlbaum

Tamir M (2005) Dont worry be happy Neuroticism trait-consistent affect regulation

and performance Journal of Personality and Social Psychology 89 (3) 449 ndash

461

Thaler R H (1985) Mental accounting and consumer choice Marketing Science 4(3) 199-214

Thaler R H (1993) Advances In Behavioral Finance New York Russel Sage Foundation

Thaler R H (1999) Mental accounting matters Journal of Behavioral Decision Making 12(3)

183-206

Tiedens L amp Linton S (2001) Judgment under emotional certainty and uncertainty the effects

of specific emotions on information processing Journal of Personality and Social

Psychology 81(6) 973-988

Todd P M amp Gigerenzer G (2007) Environments that make us smart Ecological rationality

Current Directions in Psychological Science 16 167-171

Totterdell P Briner R B Parkinson B amp Reynolds S (1996) Fingerprinting time series

dynamic patterns in self-report and performance measures uncovered by a graphical non-

linear method British Journal of Psychology 87(1) 43-60

Weber M amp Welfens F (2008) Splitting the Disposition Effect Asymmetric Reactions

Towards bdquoSelling winners‟ and bdquoHolding Losers‟ Working Paper University of

Mannheim

Wright WF amp Bower GH (1992) Mood effects on subjective probability assessment

Organizational Behavior and Human Decision Processes 52 276ndash91

25

sought to move beyond previous work that simply characterizes emotional arousal as detrimental

to performance (eg Lo et al 2005 Schunk and Bersh 2006) The study contributes to our

understanding of the role of emotions in work and decision-making in several distinct ways In

contributing to our understanding of the role of emotion at work this study has particular

relevance in that it considers a work domain which has been theorized as strongly normatively

rational as opposed to a work domain (such as negotiation or customer service) where

performance is primarily dependent on effective social interaction However it is clear from this

study that even within such an analysis-intensive domain as financial trading emotion plays a

central role Traders and their managers are frequently preoccupied with the effective regulation

and use of emotions in their work Our work points to the value of a more nuanced understanding

which considers the role of emotions in decision-making the differential impact of various

emotion regulation strategies the conditions under which gut-feellsquo may support effective

decision-making and the role of empathic responses in understanding the behavior of other

market actors

Effective emotion regulation seems to be a critical success factor in trading for our

findings suggest that the strategies for emotion regulation adopted by expert higher performing

traders are qualitatively different from those of lower performing traders In particular higher

performers are more inclined to regulate emotions through attentional deployment and cognitive

change and may display a willingness to cope with negative feelings in the interests of

maintaining objectivity and pursuing longer term goals The kind of attention and appraisal-

focused emotion regulation strategies used by high-performing traders do not seem to be too

cognitively expensive and are effective in reducing negative experience of emotion (Gross

2002) By contrast less expert traders engage either in avoidant behaviors such as walking

away from the desk or invest significant cognitive effort in modulating their emotional

26

responses This extends previous findings (eg Grandey 2003) concerning the performance

benefits of antecedent versus response-focused emotion regulation in the context of emotion

labor to the very different context of financial decision-making Our findings also suggest that

willingness to endure negative feelings in pursuit of long-term goals may be more adaptive than

purely defensive strategies aimed at maintaining positive feelings (Labouvie-Vief 2003 Tamir

2005)

This study also provides evidence that more effective emotion regulation strategies can be

learned in a financial decision-making context While an individuallsquos preferred approach to

emotion regulation is likely to be influenced by personality traits neuroticism and extroversion in

particular (Gross amp John 2003) our interviews with traders and their managers also point to the

importance of traderslsquo learned strategies for emotion regulation Importantly our study also

suggests that defensive emotion regulation strategies may be problematic because they reduce

opportunities to exercise expert intuition

These findings go well beyond prior research on emotion regulation and performance

(eg Grandey 2003) which has a primary focus on performance in the context of interpersonal

interaction Our findings uniquely address the performance of professional traders for whom

performance is not primarily dependent on interpersonal interaction and which has been

theorized as strongly rational involving the selection of optimal strategies in the face of complex

cognitive demands and requiring attention to a large volume of information with uncertain

relevance

Turning to intuition traders in our study mirror the balance of opinion in the research

literature on intuition They are equivocal about whether feelings and hunches about appropriate

courses of action lead to better or worse outcomes than purely rational analysis There were

strong feelings on both sides with traders being quite evenly divided between the two camps

27

However again our study suggests the importance of a more nuanced approach than simply

asking whether reliance on intuition is good or bad and points towards the conditions in which

reliance on intuitive judgment may be more and less effective The findings suggest that one

characteristic of higher performing traders may be a greater willingness to reflect critically about

their intuitions and feelings about trading These traders often reported relying on intuition but

they tend to weigh their feelings critically alongside other evidence and to reflect about the

provenance of those feelings Lower performing traders may rely on feelings alone and show

less propensity to think critically about the source of hunches This reflection by expert traders

about the provenance of feelings may be particularly salient given Schwarz and Clorelsquos (1983

2003) finding that the impact of emotions on behavior is reduced or disappears when the

relevance of those emotions is explicitly called into question

That traderslsquo reliance on affective cues in decision-making can support effective

performance is consistent with Damasiolsquos observation that deciding advantageously depends on

the use of affective cues in both learning and deciding (Bechara et al 1997 Damasio 1994)

There is increasing evidence that humans are naturally proficient in the ability to acquire

expertise and that encapsulation of experience in expert intuition and perception via system one

provides a means of by-passing cognitive limits (Ericsson 2006) The nature of expertise could

counteract the inherent environmental uncertainties that Tiedens and Linton (2001) identified as

leading to more conscious appraisal of information While not an unequivocal result our finding

of greater critical engagement among higher performing traders with intuitions and their more

sophisticated deployment of intuition in combination with analysis suggests an important

direction for future research

The small number of accounts of traders monitoring their own emotions as a source of

information about the emotions of other market actors was intriguing These data suggest a

28

possibly productive avenue for future research We do not have evidence of performance

outcomes of predictive uses of empathy in this manner but our findings are consistent with

arguments that the evolution of the human brain has been significantly driven by the need to

predict the behavior of other humans often via subtle cues (eg Nicholson 2000)

We suggest that the identification of links between decision-making performance and

emotion regulation in this study has important implications for theory development in two key

fields First while somewhat tacit in much of the literature the implication of many claims in the

decision-making and behavioral finance literatures is that a range of key decision-making biases

are underpinned by mechanisms which involve emotion processes One relevant explicit example

is Thalerlsquos (1985 1999) account of the role of hedonic editinglsquo in mental accounting and the

disposition effect (the tendency to hold losing assets longer than winning assets) This explains

key biases in terms of the desire to maintain positive hedonic tone There is evidence too of

interpersonal variation in propensity to exhibit such biases for example investors vary in their

propensity to exhibit the disposition effect (Shapira amp Venezia 2001 Weber amp Welfens 2008)

In this study we have seen that traders seek to regulate emotions in order to avoid decision biases

and that higher performing traders typically exhibit more sophisticated emotion regulation

strategies This suggests that it would be productive to investigate the role of emotion regulation

as one key source of interpersonal variation in susceptibility to a range of decision biases

A second implication concerns the role of emotion in expert performance While much

attention has been paid to the nature of cognition in expert performance the expertise literature

hardly considers the role of emotion For example examining the index of the Cambridge

Handbook of Expertise and Expert Performance (Ericsson et al 2006) reveals very few

references to emotion and these are peripheral to the main arguments of the chapters which

contain them Our research suggests first that effective emotion regulation may be an important

29

facet of expert performance and second that greater attention should be paid to the interactions

between emotion emotion regulation and expert intuition Further research could test the

proposition that effective expert intuition is reduced by reliance on defensive emotion regulation

strategies

While our study points to the importance of intuition in traderslsquo work it may be that the

relative importance of intuition and analysis vary with task characteristics such as time span of

decision-making Certainly this seemed to be the view of several senior managers with

responsibility for allocating traders to trading roles The interplay that expert traders described

between intuition and analysis is also intriguing The importance of context to the role of affect

in decision-making has been noted in prior research (Forgas amp George 2001) Further research

could usefully explore this aspect of traderslsquo expertise

This study also contains some potentially important implications for practice First it

points to the importance of learned strategies for emotion regulation and the need for effective

support for their development Second our data directly and indirectly point to the key role of

management in this process Our findings suggest that there may be considerable benefits to

skilled managerial interventions that help to steer effective emotion regulation and support

inexperienced traders in developing emotion regulation skills Additionally managers may be

able to help traders to understand the productive role that critically engaged experience-based

intuition may play in decision-making Our evidence suggests that many high performing traders

deploy a reflective and critical approach to the use and development of intuition well-founded in

experience Managers could help to guide this process through coaching The contextual

dependence of high quality intuitions suggests they are quite domain specific and may not

transfer across contexts As several informants told us this is especially true for traders operating

under different market conditions

30

We heard repeated concerns from senior managers who worried about traders who had

not seen a bear market and would not operate well when that occurred We also heard many

stories of people transferring between trading areas and needing time to re-contextualize

expertise before their intuitions could be considered reliable Thus managers have a role in

helping traders to extend the boundaries of their expertise Given recent events in financial

markets our findings may be relevant to an understanding of how traders react under massively

changed trading conditions and how those reactions might either contribute to or result from

market volatility

This research has some important limitations First although we have argued for the

importance of an account of emotion that includes the experience of emotion as Pham (2004

368) notes the affective system is focused on the present Thus people can be poor at recalling or

predicting emotions There are limits to the human capacity to introspect on emotion processes

and to recall the experience of emotion These limits are also subject to wide individual

differences The capacity for introspection and recall will also vary between individuals For this

reason studies such as ours need to be complemented with more physiologically based research

as well as further qualitative and quantitative studies

Second as in all work contexts traders subscribe to norms of socially sanctioned

behavior and to common narratives about the nature of their work We have not treated emotional

labor as a primary component of traderslsquo work and performance The majority of work

interactions are carried out through highly abbreviated electronic exchanges which provide a poor

medium for the communication of emotion However there is a sense in which traders engage in

emotional labor since especially for novices there are social pressures to comply with display

rules which emphasize the avoidance of displays of strong emotion One common narrative

thread that ran though many traderslsquo accounts of their work was a representation of trading work

31

as principally concerned with rational analysis from which emotions are a dangerous distraction

This narrative seemed particularly strong in the accounts of less experienced traders Although as

we have seen the mask would often slip as they discussed their work Some traderslsquo accounts

were clearly colored by a desire to conform to this mode of self-presentation In consequence it is

possible that in our interviews and during data analysis we were at times unable to distinguish

effectively between defensive denial of emotion and effective regulation of emotion This would

be another avenue for future research

To conclude we know that emotions are a rich source of experience in everyday life but

at the same time in work contexts they can be a source of vulnerability a wayward influence over

judgment and a source of disturbance to process The more ―rational-economic such

environments are the more likely we are to hold such beliefs (Nicholson 2000) Our research

illustrates that this position is false or at best short-sighted In the hyper-rational world of

trading in financial markets we did find some evidence that emotions disturbed performance but

mostly among the inexperienced and un-reflective traders The best traders are able to regulate

emotions effectively and incorporate relevant emotions as information ndash signals or a kind of

radar that contain information about risks what is going on in the minds of others and the weight

and relevance to be accorded to onelsquos own past experience

32

REFERENCES

Bargh J A Chen M amp Burrows L (1996) Automaticity of social behavior Direct effects of

trait construct and stereotype activation on action Journal of Personality and Social

Psychology 71 230-244

Baumeister R F Bratslavsky E Muraven M amp Tice D M (1998) Ego depletion Is the

active self a limited resource Journal of Personality and Social Psychology 74 1252-

1265

Bechara A Damasio A Tranel D amp Damasio A R (1997) Deciding advantageously before

knowing the advantageous strategy Science 275 1293-1295

Bower G H (1981) Mood and memory American Psychologist 36 129 ndash 148

Bower G H (1991) Mood congruity of social judgments In J P Forgas (Ed) Emotion and

social judgments (pp 31ndash53) Oxford Pergamon Press

Braun V amp Clarke V (2006) Using thematic analysis in psychology Qualitative Research in

Psychology 3(2) 77-101

Buck R (1999) The biological affects a typology Psychological Reveiw 106 301-336

Damasio A R (1994) Descartes‟ error Emotion reason and the human brain New York

Putnam

Dane E amp Pratt M G (2007) Exploring intuition and its role in managerial decision making

The Academy of Management Review 32 33-54

De Bondt W Palm F amp Wolff C (2004) Introduction to the special issue on behavioral

finance Journal of Empirical Finance 11 423-427

Dreyfus H amp Dreyfus S (2005) Expertise in real world contexts Organization Studies 26

779-792

Epstein S Pacini R Denes-Raj V amp Heier H (1996) Individual differences in intuitive-

experiential and analytical-rational thinking styles Journal of Personality and Social

Psychology 71 390-405

Ericsson K A Krampe R T amp Tesch-Roemer C (1993) The role of deliberate practice in the

acquisition of expert performance Psychological Review 100 363-406

Ericsson K A (2006) An introduction to the Cambridge Handbook of Expertise and Expert

Performance its development organization and content In K A Ericsson amp N Charness

amp P J Feltovich amp R R Hoffman (Eds) The Cambridge Handbook of Expertise and

Expert Performance 1st ed 3-20 Cambridge Cambridge University Press

Fama E F (1991) Efficient Capital Markets II The Journal of Finance 46 1575-1617

Fama E F (1998) Market efficiency long-term returns and behavioral finance Journal of

Financial Economics Vol 49 283-306

Fenton-OCreevy M Nicholson N Soane E amp Willman P (2005) Traders Risks Decisions

and Management in Financial Markets Oxford Oxford University Press

Finucane M L Alhakami A Slovic P amp Johnson S M (2000) The affect heuristic in

judgments of risks and benefits Journal of Behavioral Decision Making 13(1) 1-17

Forgas JP amp George JM (2001) Affective influences on judgments and behavior in

organizations An information processing perspective Organizational Behavior and

Human Decision Processes 86(1) 3-34

Grandey AA (2000) Emotion Regulation in the Workplace A new way to conceptualize

Emotional Labor Journal of Occupational Health Psychology 5(1) 95-110

33

Grandey A A (2003) When the show must go on surface acting and deep acting as

determinants of emotional exhaustion and peer-rated service delivery Academy of

Management Journal 46 86-96

Gray JA (1999) Cognition emotion conscious experience and the brain In T Dalgleish and

MJ Power (Eds) Handbook of Cognition and Emotion (pp83-102) Chichester England

Wiley

Gross J (2002) Emotion regulation affective cognitive and social consequences

Psychophysiology 39 281

Gross J J amp John O P (2003) Individual differences in two emotion regulation processes

Implications for affect relationships and well-being Journal of Personality and Social

Psychology 85(2) 348-362

Gross J J amp Thompson R A (2007) Emotion regulation Conceptual foundations In J J

Gross (Ed) Handbook of emotion regulation New York NY Guilford Press

Isen A M Shalker T E Clark M amp Karp L (1978) Affect accessibility of material in

memory and behavior A cognitive loop Journal of Personality and Social Psychology

36 1-12

Johnson E amp Tversky A (1983) Affect generalization and the perception of risk Journal of

Personality and Social Psychology 45(1) 20-31

Kavanaugh D amp Bower G (1985) Mood and self-efficacy Impact of job and sadness on

perceived capabilities Cognitive Therapy and Research 9 507-525

Klein G A Calderwood R amp Clinton Cirocco A (1986) Rapid decision-making on the

fireground Human Factors and Ergonomics Society 30th Annual Meeting Vol 1 576-

580

Knorr-Cetina K amp Brugger U (2002) Traders Engagement with Markets A Postsocial

Relationship Theory Culture and Society 19(5-6) 161-185

Labouvie-Vief G (2003) Dynamic integration Affect cognition and the self in adulthood

Current Directions in Psychological Science 12 201-206

Lerner J S amp Keltner D (2001) Fear anger and risk Journal of Personality and Social

Psychology 81(1) 146-159

Lerner J S Small D A amp Loewenstein G (2004) Heart strings and purse strings Carryover

effects of emotions on economic decisions Psychological Science 15(5) 337-341

Lo A Repin D amp Steenbarger B (2005) Fear and greed in financial markets A clinical study

of day traders American Economic Review 95 352-359

Lo A W amp Repin D V (2002) The Psychophysiology of Real-Time Financial Risk

Processing Journal of Cognitive Neuroscience 14 323-339

MacKenzie D (2006) An Engine Not A Camera How Financial Models Shape Markets

Cambridge Mass MIT Press

Mayer JD amp Hanson A (1995) Mood-congruent judgment over time Personality and Social

Psychology Bulletin 21 237-244

Mayer JD DiPaolo M and Salovey P (1990) Perceiving affective content in ambiguous

visual stimuli a component of emotional intelligence Journal of Personality Assessment

54 772-781

Miller G (2003) The cognitive revolution a historical perspective Trends in Cognitive Science

7 141

Muraven M amp Baumeister R F (2000) Self-regulation and depletion of limited resources

Does self-control resemble a muscle Psychological Bulletin 126 247-259

Nicholson N (2000) Managing the Human Animal London ThomsonTexere

34

Peterson R L (2007) Affect and financial decision-making How neuroscience can inform

market participants The Journal of Behavioral Finance 8(2) 70-78

Pham M T (2004) The logic of feeling Journal of Consumer Psychology 14 360-369

Phelps E A (2006) Emotion and cognition Insights from studies of the human amygdala

Annual Review of Psychology 57 27-53

Sayer A (1997) Essentialism social constructionism and beyond The Sociological Review 45

453-487

Shapira Z amp Venezia I (2001) Patterns of behavior of professionally managed and

independent investors Journal of Banking and Finance 25 1573ndash1587

Schunk D amp Betsch C (2006) Explaining the heterogeneity in utility functions by individual

differences in decision modes Journal of Economic Psychology 27 386-401

Schwager J D (1993) Market Wizards Interviews with Top Traders New York Collins

Schwarz N amp Clore G L (1983) Mood misattribution and judgments of well-being

Informative and directive functions of affective states Journal of Personality and Social

Psychology 45 513-523

Seo M G Barrett L F amp Bartunek J M (2004) The role of affective experience in work

motivation Academy of Management Review 29 423-439

Seo M G amp Barrett L F (2007) Being emotional during decision makingmdashgood or bad An

empirical investigation The Academy of Management Journal 50 923-940

Shefrin H (2000) Beyond Greed and Fear Understanding Behavioral Finance and the

Psychology of Investing Boston MA Harvard Business School Press

Stokes A F Kemper K amp Kite K (1997) Aeronautical decision making cue recognition and

expertise under time pressure In C E Zsambok amp G Klein (Eds) Naturalistic Decision

Making pp 183-196 Mahwah NJ Erlbaum

Tamir M (2005) Dont worry be happy Neuroticism trait-consistent affect regulation

and performance Journal of Personality and Social Psychology 89 (3) 449 ndash

461

Thaler R H (1985) Mental accounting and consumer choice Marketing Science 4(3) 199-214

Thaler R H (1993) Advances In Behavioral Finance New York Russel Sage Foundation

Thaler R H (1999) Mental accounting matters Journal of Behavioral Decision Making 12(3)

183-206

Tiedens L amp Linton S (2001) Judgment under emotional certainty and uncertainty the effects

of specific emotions on information processing Journal of Personality and Social

Psychology 81(6) 973-988

Todd P M amp Gigerenzer G (2007) Environments that make us smart Ecological rationality

Current Directions in Psychological Science 16 167-171

Totterdell P Briner R B Parkinson B amp Reynolds S (1996) Fingerprinting time series

dynamic patterns in self-report and performance measures uncovered by a graphical non-

linear method British Journal of Psychology 87(1) 43-60

Weber M amp Welfens F (2008) Splitting the Disposition Effect Asymmetric Reactions

Towards bdquoSelling winners‟ and bdquoHolding Losers‟ Working Paper University of

Mannheim

Wright WF amp Bower GH (1992) Mood effects on subjective probability assessment

Organizational Behavior and Human Decision Processes 52 276ndash91

26

responses This extends previous findings (eg Grandey 2003) concerning the performance

benefits of antecedent versus response-focused emotion regulation in the context of emotion

labor to the very different context of financial decision-making Our findings also suggest that

willingness to endure negative feelings in pursuit of long-term goals may be more adaptive than

purely defensive strategies aimed at maintaining positive feelings (Labouvie-Vief 2003 Tamir

2005)

This study also provides evidence that more effective emotion regulation strategies can be

learned in a financial decision-making context While an individuallsquos preferred approach to

emotion regulation is likely to be influenced by personality traits neuroticism and extroversion in

particular (Gross amp John 2003) our interviews with traders and their managers also point to the

importance of traderslsquo learned strategies for emotion regulation Importantly our study also

suggests that defensive emotion regulation strategies may be problematic because they reduce

opportunities to exercise expert intuition

These findings go well beyond prior research on emotion regulation and performance

(eg Grandey 2003) which has a primary focus on performance in the context of interpersonal

interaction Our findings uniquely address the performance of professional traders for whom

performance is not primarily dependent on interpersonal interaction and which has been

theorized as strongly rational involving the selection of optimal strategies in the face of complex

cognitive demands and requiring attention to a large volume of information with uncertain

relevance

Turning to intuition traders in our study mirror the balance of opinion in the research

literature on intuition They are equivocal about whether feelings and hunches about appropriate

courses of action lead to better or worse outcomes than purely rational analysis There were

strong feelings on both sides with traders being quite evenly divided between the two camps

27

However again our study suggests the importance of a more nuanced approach than simply

asking whether reliance on intuition is good or bad and points towards the conditions in which

reliance on intuitive judgment may be more and less effective The findings suggest that one

characteristic of higher performing traders may be a greater willingness to reflect critically about

their intuitions and feelings about trading These traders often reported relying on intuition but

they tend to weigh their feelings critically alongside other evidence and to reflect about the

provenance of those feelings Lower performing traders may rely on feelings alone and show

less propensity to think critically about the source of hunches This reflection by expert traders

about the provenance of feelings may be particularly salient given Schwarz and Clorelsquos (1983

2003) finding that the impact of emotions on behavior is reduced or disappears when the

relevance of those emotions is explicitly called into question

That traderslsquo reliance on affective cues in decision-making can support effective

performance is consistent with Damasiolsquos observation that deciding advantageously depends on

the use of affective cues in both learning and deciding (Bechara et al 1997 Damasio 1994)

There is increasing evidence that humans are naturally proficient in the ability to acquire

expertise and that encapsulation of experience in expert intuition and perception via system one

provides a means of by-passing cognitive limits (Ericsson 2006) The nature of expertise could

counteract the inherent environmental uncertainties that Tiedens and Linton (2001) identified as

leading to more conscious appraisal of information While not an unequivocal result our finding

of greater critical engagement among higher performing traders with intuitions and their more

sophisticated deployment of intuition in combination with analysis suggests an important

direction for future research

The small number of accounts of traders monitoring their own emotions as a source of

information about the emotions of other market actors was intriguing These data suggest a

28

possibly productive avenue for future research We do not have evidence of performance

outcomes of predictive uses of empathy in this manner but our findings are consistent with

arguments that the evolution of the human brain has been significantly driven by the need to

predict the behavior of other humans often via subtle cues (eg Nicholson 2000)

We suggest that the identification of links between decision-making performance and

emotion regulation in this study has important implications for theory development in two key

fields First while somewhat tacit in much of the literature the implication of many claims in the

decision-making and behavioral finance literatures is that a range of key decision-making biases

are underpinned by mechanisms which involve emotion processes One relevant explicit example

is Thalerlsquos (1985 1999) account of the role of hedonic editinglsquo in mental accounting and the

disposition effect (the tendency to hold losing assets longer than winning assets) This explains

key biases in terms of the desire to maintain positive hedonic tone There is evidence too of

interpersonal variation in propensity to exhibit such biases for example investors vary in their

propensity to exhibit the disposition effect (Shapira amp Venezia 2001 Weber amp Welfens 2008)

In this study we have seen that traders seek to regulate emotions in order to avoid decision biases

and that higher performing traders typically exhibit more sophisticated emotion regulation

strategies This suggests that it would be productive to investigate the role of emotion regulation

as one key source of interpersonal variation in susceptibility to a range of decision biases

A second implication concerns the role of emotion in expert performance While much

attention has been paid to the nature of cognition in expert performance the expertise literature

hardly considers the role of emotion For example examining the index of the Cambridge

Handbook of Expertise and Expert Performance (Ericsson et al 2006) reveals very few

references to emotion and these are peripheral to the main arguments of the chapters which

contain them Our research suggests first that effective emotion regulation may be an important

29

facet of expert performance and second that greater attention should be paid to the interactions

between emotion emotion regulation and expert intuition Further research could test the

proposition that effective expert intuition is reduced by reliance on defensive emotion regulation

strategies

While our study points to the importance of intuition in traderslsquo work it may be that the

relative importance of intuition and analysis vary with task characteristics such as time span of

decision-making Certainly this seemed to be the view of several senior managers with

responsibility for allocating traders to trading roles The interplay that expert traders described

between intuition and analysis is also intriguing The importance of context to the role of affect

in decision-making has been noted in prior research (Forgas amp George 2001) Further research

could usefully explore this aspect of traderslsquo expertise

This study also contains some potentially important implications for practice First it

points to the importance of learned strategies for emotion regulation and the need for effective

support for their development Second our data directly and indirectly point to the key role of

management in this process Our findings suggest that there may be considerable benefits to

skilled managerial interventions that help to steer effective emotion regulation and support

inexperienced traders in developing emotion regulation skills Additionally managers may be

able to help traders to understand the productive role that critically engaged experience-based

intuition may play in decision-making Our evidence suggests that many high performing traders

deploy a reflective and critical approach to the use and development of intuition well-founded in

experience Managers could help to guide this process through coaching The contextual

dependence of high quality intuitions suggests they are quite domain specific and may not

transfer across contexts As several informants told us this is especially true for traders operating

under different market conditions

30

We heard repeated concerns from senior managers who worried about traders who had

not seen a bear market and would not operate well when that occurred We also heard many

stories of people transferring between trading areas and needing time to re-contextualize

expertise before their intuitions could be considered reliable Thus managers have a role in

helping traders to extend the boundaries of their expertise Given recent events in financial

markets our findings may be relevant to an understanding of how traders react under massively

changed trading conditions and how those reactions might either contribute to or result from

market volatility

This research has some important limitations First although we have argued for the

importance of an account of emotion that includes the experience of emotion as Pham (2004

368) notes the affective system is focused on the present Thus people can be poor at recalling or

predicting emotions There are limits to the human capacity to introspect on emotion processes

and to recall the experience of emotion These limits are also subject to wide individual

differences The capacity for introspection and recall will also vary between individuals For this

reason studies such as ours need to be complemented with more physiologically based research

as well as further qualitative and quantitative studies

Second as in all work contexts traders subscribe to norms of socially sanctioned

behavior and to common narratives about the nature of their work We have not treated emotional

labor as a primary component of traderslsquo work and performance The majority of work

interactions are carried out through highly abbreviated electronic exchanges which provide a poor

medium for the communication of emotion However there is a sense in which traders engage in

emotional labor since especially for novices there are social pressures to comply with display

rules which emphasize the avoidance of displays of strong emotion One common narrative

thread that ran though many traderslsquo accounts of their work was a representation of trading work

31

as principally concerned with rational analysis from which emotions are a dangerous distraction

This narrative seemed particularly strong in the accounts of less experienced traders Although as

we have seen the mask would often slip as they discussed their work Some traderslsquo accounts

were clearly colored by a desire to conform to this mode of self-presentation In consequence it is

possible that in our interviews and during data analysis we were at times unable to distinguish

effectively between defensive denial of emotion and effective regulation of emotion This would

be another avenue for future research

To conclude we know that emotions are a rich source of experience in everyday life but

at the same time in work contexts they can be a source of vulnerability a wayward influence over

judgment and a source of disturbance to process The more ―rational-economic such

environments are the more likely we are to hold such beliefs (Nicholson 2000) Our research

illustrates that this position is false or at best short-sighted In the hyper-rational world of

trading in financial markets we did find some evidence that emotions disturbed performance but

mostly among the inexperienced and un-reflective traders The best traders are able to regulate

emotions effectively and incorporate relevant emotions as information ndash signals or a kind of

radar that contain information about risks what is going on in the minds of others and the weight

and relevance to be accorded to onelsquos own past experience

32

REFERENCES

Bargh J A Chen M amp Burrows L (1996) Automaticity of social behavior Direct effects of

trait construct and stereotype activation on action Journal of Personality and Social

Psychology 71 230-244

Baumeister R F Bratslavsky E Muraven M amp Tice D M (1998) Ego depletion Is the

active self a limited resource Journal of Personality and Social Psychology 74 1252-

1265

Bechara A Damasio A Tranel D amp Damasio A R (1997) Deciding advantageously before

knowing the advantageous strategy Science 275 1293-1295

Bower G H (1981) Mood and memory American Psychologist 36 129 ndash 148

Bower G H (1991) Mood congruity of social judgments In J P Forgas (Ed) Emotion and

social judgments (pp 31ndash53) Oxford Pergamon Press

Braun V amp Clarke V (2006) Using thematic analysis in psychology Qualitative Research in

Psychology 3(2) 77-101

Buck R (1999) The biological affects a typology Psychological Reveiw 106 301-336

Damasio A R (1994) Descartes‟ error Emotion reason and the human brain New York

Putnam

Dane E amp Pratt M G (2007) Exploring intuition and its role in managerial decision making

The Academy of Management Review 32 33-54

De Bondt W Palm F amp Wolff C (2004) Introduction to the special issue on behavioral

finance Journal of Empirical Finance 11 423-427

Dreyfus H amp Dreyfus S (2005) Expertise in real world contexts Organization Studies 26

779-792

Epstein S Pacini R Denes-Raj V amp Heier H (1996) Individual differences in intuitive-

experiential and analytical-rational thinking styles Journal of Personality and Social

Psychology 71 390-405

Ericsson K A Krampe R T amp Tesch-Roemer C (1993) The role of deliberate practice in the

acquisition of expert performance Psychological Review 100 363-406

Ericsson K A (2006) An introduction to the Cambridge Handbook of Expertise and Expert

Performance its development organization and content In K A Ericsson amp N Charness

amp P J Feltovich amp R R Hoffman (Eds) The Cambridge Handbook of Expertise and

Expert Performance 1st ed 3-20 Cambridge Cambridge University Press

Fama E F (1991) Efficient Capital Markets II The Journal of Finance 46 1575-1617

Fama E F (1998) Market efficiency long-term returns and behavioral finance Journal of

Financial Economics Vol 49 283-306

Fenton-OCreevy M Nicholson N Soane E amp Willman P (2005) Traders Risks Decisions

and Management in Financial Markets Oxford Oxford University Press

Finucane M L Alhakami A Slovic P amp Johnson S M (2000) The affect heuristic in

judgments of risks and benefits Journal of Behavioral Decision Making 13(1) 1-17

Forgas JP amp George JM (2001) Affective influences on judgments and behavior in

organizations An information processing perspective Organizational Behavior and

Human Decision Processes 86(1) 3-34

Grandey AA (2000) Emotion Regulation in the Workplace A new way to conceptualize

Emotional Labor Journal of Occupational Health Psychology 5(1) 95-110

33

Grandey A A (2003) When the show must go on surface acting and deep acting as

determinants of emotional exhaustion and peer-rated service delivery Academy of

Management Journal 46 86-96

Gray JA (1999) Cognition emotion conscious experience and the brain In T Dalgleish and

MJ Power (Eds) Handbook of Cognition and Emotion (pp83-102) Chichester England

Wiley

Gross J (2002) Emotion regulation affective cognitive and social consequences

Psychophysiology 39 281

Gross J J amp John O P (2003) Individual differences in two emotion regulation processes

Implications for affect relationships and well-being Journal of Personality and Social

Psychology 85(2) 348-362

Gross J J amp Thompson R A (2007) Emotion regulation Conceptual foundations In J J

Gross (Ed) Handbook of emotion regulation New York NY Guilford Press

Isen A M Shalker T E Clark M amp Karp L (1978) Affect accessibility of material in

memory and behavior A cognitive loop Journal of Personality and Social Psychology

36 1-12

Johnson E amp Tversky A (1983) Affect generalization and the perception of risk Journal of

Personality and Social Psychology 45(1) 20-31

Kavanaugh D amp Bower G (1985) Mood and self-efficacy Impact of job and sadness on

perceived capabilities Cognitive Therapy and Research 9 507-525

Klein G A Calderwood R amp Clinton Cirocco A (1986) Rapid decision-making on the

fireground Human Factors and Ergonomics Society 30th Annual Meeting Vol 1 576-

580

Knorr-Cetina K amp Brugger U (2002) Traders Engagement with Markets A Postsocial

Relationship Theory Culture and Society 19(5-6) 161-185

Labouvie-Vief G (2003) Dynamic integration Affect cognition and the self in adulthood

Current Directions in Psychological Science 12 201-206

Lerner J S amp Keltner D (2001) Fear anger and risk Journal of Personality and Social

Psychology 81(1) 146-159

Lerner J S Small D A amp Loewenstein G (2004) Heart strings and purse strings Carryover

effects of emotions on economic decisions Psychological Science 15(5) 337-341

Lo A Repin D amp Steenbarger B (2005) Fear and greed in financial markets A clinical study

of day traders American Economic Review 95 352-359

Lo A W amp Repin D V (2002) The Psychophysiology of Real-Time Financial Risk

Processing Journal of Cognitive Neuroscience 14 323-339

MacKenzie D (2006) An Engine Not A Camera How Financial Models Shape Markets

Cambridge Mass MIT Press

Mayer JD amp Hanson A (1995) Mood-congruent judgment over time Personality and Social

Psychology Bulletin 21 237-244

Mayer JD DiPaolo M and Salovey P (1990) Perceiving affective content in ambiguous

visual stimuli a component of emotional intelligence Journal of Personality Assessment

54 772-781

Miller G (2003) The cognitive revolution a historical perspective Trends in Cognitive Science

7 141

Muraven M amp Baumeister R F (2000) Self-regulation and depletion of limited resources

Does self-control resemble a muscle Psychological Bulletin 126 247-259

Nicholson N (2000) Managing the Human Animal London ThomsonTexere

34

Peterson R L (2007) Affect and financial decision-making How neuroscience can inform

market participants The Journal of Behavioral Finance 8(2) 70-78

Pham M T (2004) The logic of feeling Journal of Consumer Psychology 14 360-369

Phelps E A (2006) Emotion and cognition Insights from studies of the human amygdala

Annual Review of Psychology 57 27-53

Sayer A (1997) Essentialism social constructionism and beyond The Sociological Review 45

453-487

Shapira Z amp Venezia I (2001) Patterns of behavior of professionally managed and

independent investors Journal of Banking and Finance 25 1573ndash1587

Schunk D amp Betsch C (2006) Explaining the heterogeneity in utility functions by individual

differences in decision modes Journal of Economic Psychology 27 386-401

Schwager J D (1993) Market Wizards Interviews with Top Traders New York Collins

Schwarz N amp Clore G L (1983) Mood misattribution and judgments of well-being

Informative and directive functions of affective states Journal of Personality and Social

Psychology 45 513-523

Seo M G Barrett L F amp Bartunek J M (2004) The role of affective experience in work

motivation Academy of Management Review 29 423-439

Seo M G amp Barrett L F (2007) Being emotional during decision makingmdashgood or bad An

empirical investigation The Academy of Management Journal 50 923-940

Shefrin H (2000) Beyond Greed and Fear Understanding Behavioral Finance and the

Psychology of Investing Boston MA Harvard Business School Press

Stokes A F Kemper K amp Kite K (1997) Aeronautical decision making cue recognition and

expertise under time pressure In C E Zsambok amp G Klein (Eds) Naturalistic Decision

Making pp 183-196 Mahwah NJ Erlbaum

Tamir M (2005) Dont worry be happy Neuroticism trait-consistent affect regulation

and performance Journal of Personality and Social Psychology 89 (3) 449 ndash

461

Thaler R H (1985) Mental accounting and consumer choice Marketing Science 4(3) 199-214

Thaler R H (1993) Advances In Behavioral Finance New York Russel Sage Foundation

Thaler R H (1999) Mental accounting matters Journal of Behavioral Decision Making 12(3)

183-206

Tiedens L amp Linton S (2001) Judgment under emotional certainty and uncertainty the effects

of specific emotions on information processing Journal of Personality and Social

Psychology 81(6) 973-988

Todd P M amp Gigerenzer G (2007) Environments that make us smart Ecological rationality

Current Directions in Psychological Science 16 167-171

Totterdell P Briner R B Parkinson B amp Reynolds S (1996) Fingerprinting time series

dynamic patterns in self-report and performance measures uncovered by a graphical non-

linear method British Journal of Psychology 87(1) 43-60

Weber M amp Welfens F (2008) Splitting the Disposition Effect Asymmetric Reactions

Towards bdquoSelling winners‟ and bdquoHolding Losers‟ Working Paper University of

Mannheim

Wright WF amp Bower GH (1992) Mood effects on subjective probability assessment

Organizational Behavior and Human Decision Processes 52 276ndash91

27

However again our study suggests the importance of a more nuanced approach than simply

asking whether reliance on intuition is good or bad and points towards the conditions in which

reliance on intuitive judgment may be more and less effective The findings suggest that one

characteristic of higher performing traders may be a greater willingness to reflect critically about

their intuitions and feelings about trading These traders often reported relying on intuition but

they tend to weigh their feelings critically alongside other evidence and to reflect about the

provenance of those feelings Lower performing traders may rely on feelings alone and show

less propensity to think critically about the source of hunches This reflection by expert traders

about the provenance of feelings may be particularly salient given Schwarz and Clorelsquos (1983

2003) finding that the impact of emotions on behavior is reduced or disappears when the

relevance of those emotions is explicitly called into question

That traderslsquo reliance on affective cues in decision-making can support effective

performance is consistent with Damasiolsquos observation that deciding advantageously depends on

the use of affective cues in both learning and deciding (Bechara et al 1997 Damasio 1994)

There is increasing evidence that humans are naturally proficient in the ability to acquire

expertise and that encapsulation of experience in expert intuition and perception via system one

provides a means of by-passing cognitive limits (Ericsson 2006) The nature of expertise could

counteract the inherent environmental uncertainties that Tiedens and Linton (2001) identified as

leading to more conscious appraisal of information While not an unequivocal result our finding

of greater critical engagement among higher performing traders with intuitions and their more

sophisticated deployment of intuition in combination with analysis suggests an important

direction for future research

The small number of accounts of traders monitoring their own emotions as a source of

information about the emotions of other market actors was intriguing These data suggest a

28

possibly productive avenue for future research We do not have evidence of performance

outcomes of predictive uses of empathy in this manner but our findings are consistent with

arguments that the evolution of the human brain has been significantly driven by the need to

predict the behavior of other humans often via subtle cues (eg Nicholson 2000)

We suggest that the identification of links between decision-making performance and

emotion regulation in this study has important implications for theory development in two key

fields First while somewhat tacit in much of the literature the implication of many claims in the

decision-making and behavioral finance literatures is that a range of key decision-making biases

are underpinned by mechanisms which involve emotion processes One relevant explicit example

is Thalerlsquos (1985 1999) account of the role of hedonic editinglsquo in mental accounting and the

disposition effect (the tendency to hold losing assets longer than winning assets) This explains

key biases in terms of the desire to maintain positive hedonic tone There is evidence too of

interpersonal variation in propensity to exhibit such biases for example investors vary in their

propensity to exhibit the disposition effect (Shapira amp Venezia 2001 Weber amp Welfens 2008)

In this study we have seen that traders seek to regulate emotions in order to avoid decision biases

and that higher performing traders typically exhibit more sophisticated emotion regulation

strategies This suggests that it would be productive to investigate the role of emotion regulation

as one key source of interpersonal variation in susceptibility to a range of decision biases

A second implication concerns the role of emotion in expert performance While much

attention has been paid to the nature of cognition in expert performance the expertise literature

hardly considers the role of emotion For example examining the index of the Cambridge

Handbook of Expertise and Expert Performance (Ericsson et al 2006) reveals very few

references to emotion and these are peripheral to the main arguments of the chapters which

contain them Our research suggests first that effective emotion regulation may be an important

29

facet of expert performance and second that greater attention should be paid to the interactions

between emotion emotion regulation and expert intuition Further research could test the

proposition that effective expert intuition is reduced by reliance on defensive emotion regulation

strategies

While our study points to the importance of intuition in traderslsquo work it may be that the

relative importance of intuition and analysis vary with task characteristics such as time span of

decision-making Certainly this seemed to be the view of several senior managers with

responsibility for allocating traders to trading roles The interplay that expert traders described

between intuition and analysis is also intriguing The importance of context to the role of affect

in decision-making has been noted in prior research (Forgas amp George 2001) Further research

could usefully explore this aspect of traderslsquo expertise

This study also contains some potentially important implications for practice First it

points to the importance of learned strategies for emotion regulation and the need for effective

support for their development Second our data directly and indirectly point to the key role of

management in this process Our findings suggest that there may be considerable benefits to

skilled managerial interventions that help to steer effective emotion regulation and support

inexperienced traders in developing emotion regulation skills Additionally managers may be

able to help traders to understand the productive role that critically engaged experience-based

intuition may play in decision-making Our evidence suggests that many high performing traders

deploy a reflective and critical approach to the use and development of intuition well-founded in

experience Managers could help to guide this process through coaching The contextual

dependence of high quality intuitions suggests they are quite domain specific and may not

transfer across contexts As several informants told us this is especially true for traders operating

under different market conditions

30

We heard repeated concerns from senior managers who worried about traders who had

not seen a bear market and would not operate well when that occurred We also heard many

stories of people transferring between trading areas and needing time to re-contextualize

expertise before their intuitions could be considered reliable Thus managers have a role in

helping traders to extend the boundaries of their expertise Given recent events in financial

markets our findings may be relevant to an understanding of how traders react under massively

changed trading conditions and how those reactions might either contribute to or result from

market volatility

This research has some important limitations First although we have argued for the

importance of an account of emotion that includes the experience of emotion as Pham (2004

368) notes the affective system is focused on the present Thus people can be poor at recalling or

predicting emotions There are limits to the human capacity to introspect on emotion processes

and to recall the experience of emotion These limits are also subject to wide individual

differences The capacity for introspection and recall will also vary between individuals For this

reason studies such as ours need to be complemented with more physiologically based research

as well as further qualitative and quantitative studies

Second as in all work contexts traders subscribe to norms of socially sanctioned

behavior and to common narratives about the nature of their work We have not treated emotional

labor as a primary component of traderslsquo work and performance The majority of work

interactions are carried out through highly abbreviated electronic exchanges which provide a poor

medium for the communication of emotion However there is a sense in which traders engage in

emotional labor since especially for novices there are social pressures to comply with display

rules which emphasize the avoidance of displays of strong emotion One common narrative

thread that ran though many traderslsquo accounts of their work was a representation of trading work

31

as principally concerned with rational analysis from which emotions are a dangerous distraction

This narrative seemed particularly strong in the accounts of less experienced traders Although as

we have seen the mask would often slip as they discussed their work Some traderslsquo accounts

were clearly colored by a desire to conform to this mode of self-presentation In consequence it is

possible that in our interviews and during data analysis we were at times unable to distinguish

effectively between defensive denial of emotion and effective regulation of emotion This would

be another avenue for future research

To conclude we know that emotions are a rich source of experience in everyday life but

at the same time in work contexts they can be a source of vulnerability a wayward influence over

judgment and a source of disturbance to process The more ―rational-economic such

environments are the more likely we are to hold such beliefs (Nicholson 2000) Our research

illustrates that this position is false or at best short-sighted In the hyper-rational world of

trading in financial markets we did find some evidence that emotions disturbed performance but

mostly among the inexperienced and un-reflective traders The best traders are able to regulate

emotions effectively and incorporate relevant emotions as information ndash signals or a kind of

radar that contain information about risks what is going on in the minds of others and the weight

and relevance to be accorded to onelsquos own past experience

32

REFERENCES

Bargh J A Chen M amp Burrows L (1996) Automaticity of social behavior Direct effects of

trait construct and stereotype activation on action Journal of Personality and Social

Psychology 71 230-244

Baumeister R F Bratslavsky E Muraven M amp Tice D M (1998) Ego depletion Is the

active self a limited resource Journal of Personality and Social Psychology 74 1252-

1265

Bechara A Damasio A Tranel D amp Damasio A R (1997) Deciding advantageously before

knowing the advantageous strategy Science 275 1293-1295

Bower G H (1981) Mood and memory American Psychologist 36 129 ndash 148

Bower G H (1991) Mood congruity of social judgments In J P Forgas (Ed) Emotion and

social judgments (pp 31ndash53) Oxford Pergamon Press

Braun V amp Clarke V (2006) Using thematic analysis in psychology Qualitative Research in

Psychology 3(2) 77-101

Buck R (1999) The biological affects a typology Psychological Reveiw 106 301-336

Damasio A R (1994) Descartes‟ error Emotion reason and the human brain New York

Putnam

Dane E amp Pratt M G (2007) Exploring intuition and its role in managerial decision making

The Academy of Management Review 32 33-54

De Bondt W Palm F amp Wolff C (2004) Introduction to the special issue on behavioral

finance Journal of Empirical Finance 11 423-427

Dreyfus H amp Dreyfus S (2005) Expertise in real world contexts Organization Studies 26

779-792

Epstein S Pacini R Denes-Raj V amp Heier H (1996) Individual differences in intuitive-

experiential and analytical-rational thinking styles Journal of Personality and Social

Psychology 71 390-405

Ericsson K A Krampe R T amp Tesch-Roemer C (1993) The role of deliberate practice in the

acquisition of expert performance Psychological Review 100 363-406

Ericsson K A (2006) An introduction to the Cambridge Handbook of Expertise and Expert

Performance its development organization and content In K A Ericsson amp N Charness

amp P J Feltovich amp R R Hoffman (Eds) The Cambridge Handbook of Expertise and

Expert Performance 1st ed 3-20 Cambridge Cambridge University Press

Fama E F (1991) Efficient Capital Markets II The Journal of Finance 46 1575-1617

Fama E F (1998) Market efficiency long-term returns and behavioral finance Journal of

Financial Economics Vol 49 283-306

Fenton-OCreevy M Nicholson N Soane E amp Willman P (2005) Traders Risks Decisions

and Management in Financial Markets Oxford Oxford University Press

Finucane M L Alhakami A Slovic P amp Johnson S M (2000) The affect heuristic in

judgments of risks and benefits Journal of Behavioral Decision Making 13(1) 1-17

Forgas JP amp George JM (2001) Affective influences on judgments and behavior in

organizations An information processing perspective Organizational Behavior and

Human Decision Processes 86(1) 3-34

Grandey AA (2000) Emotion Regulation in the Workplace A new way to conceptualize

Emotional Labor Journal of Occupational Health Psychology 5(1) 95-110

33

Grandey A A (2003) When the show must go on surface acting and deep acting as

determinants of emotional exhaustion and peer-rated service delivery Academy of

Management Journal 46 86-96

Gray JA (1999) Cognition emotion conscious experience and the brain In T Dalgleish and

MJ Power (Eds) Handbook of Cognition and Emotion (pp83-102) Chichester England

Wiley

Gross J (2002) Emotion regulation affective cognitive and social consequences

Psychophysiology 39 281

Gross J J amp John O P (2003) Individual differences in two emotion regulation processes

Implications for affect relationships and well-being Journal of Personality and Social

Psychology 85(2) 348-362

Gross J J amp Thompson R A (2007) Emotion regulation Conceptual foundations In J J

Gross (Ed) Handbook of emotion regulation New York NY Guilford Press

Isen A M Shalker T E Clark M amp Karp L (1978) Affect accessibility of material in

memory and behavior A cognitive loop Journal of Personality and Social Psychology

36 1-12

Johnson E amp Tversky A (1983) Affect generalization and the perception of risk Journal of

Personality and Social Psychology 45(1) 20-31

Kavanaugh D amp Bower G (1985) Mood and self-efficacy Impact of job and sadness on

perceived capabilities Cognitive Therapy and Research 9 507-525

Klein G A Calderwood R amp Clinton Cirocco A (1986) Rapid decision-making on the

fireground Human Factors and Ergonomics Society 30th Annual Meeting Vol 1 576-

580

Knorr-Cetina K amp Brugger U (2002) Traders Engagement with Markets A Postsocial

Relationship Theory Culture and Society 19(5-6) 161-185

Labouvie-Vief G (2003) Dynamic integration Affect cognition and the self in adulthood

Current Directions in Psychological Science 12 201-206

Lerner J S amp Keltner D (2001) Fear anger and risk Journal of Personality and Social

Psychology 81(1) 146-159

Lerner J S Small D A amp Loewenstein G (2004) Heart strings and purse strings Carryover

effects of emotions on economic decisions Psychological Science 15(5) 337-341

Lo A Repin D amp Steenbarger B (2005) Fear and greed in financial markets A clinical study

of day traders American Economic Review 95 352-359

Lo A W amp Repin D V (2002) The Psychophysiology of Real-Time Financial Risk

Processing Journal of Cognitive Neuroscience 14 323-339

MacKenzie D (2006) An Engine Not A Camera How Financial Models Shape Markets

Cambridge Mass MIT Press

Mayer JD amp Hanson A (1995) Mood-congruent judgment over time Personality and Social

Psychology Bulletin 21 237-244

Mayer JD DiPaolo M and Salovey P (1990) Perceiving affective content in ambiguous

visual stimuli a component of emotional intelligence Journal of Personality Assessment

54 772-781

Miller G (2003) The cognitive revolution a historical perspective Trends in Cognitive Science

7 141

Muraven M amp Baumeister R F (2000) Self-regulation and depletion of limited resources

Does self-control resemble a muscle Psychological Bulletin 126 247-259

Nicholson N (2000) Managing the Human Animal London ThomsonTexere

34

Peterson R L (2007) Affect and financial decision-making How neuroscience can inform

market participants The Journal of Behavioral Finance 8(2) 70-78

Pham M T (2004) The logic of feeling Journal of Consumer Psychology 14 360-369

Phelps E A (2006) Emotion and cognition Insights from studies of the human amygdala

Annual Review of Psychology 57 27-53

Sayer A (1997) Essentialism social constructionism and beyond The Sociological Review 45

453-487

Shapira Z amp Venezia I (2001) Patterns of behavior of professionally managed and

independent investors Journal of Banking and Finance 25 1573ndash1587

Schunk D amp Betsch C (2006) Explaining the heterogeneity in utility functions by individual

differences in decision modes Journal of Economic Psychology 27 386-401

Schwager J D (1993) Market Wizards Interviews with Top Traders New York Collins

Schwarz N amp Clore G L (1983) Mood misattribution and judgments of well-being

Informative and directive functions of affective states Journal of Personality and Social

Psychology 45 513-523

Seo M G Barrett L F amp Bartunek J M (2004) The role of affective experience in work

motivation Academy of Management Review 29 423-439

Seo M G amp Barrett L F (2007) Being emotional during decision makingmdashgood or bad An

empirical investigation The Academy of Management Journal 50 923-940

Shefrin H (2000) Beyond Greed and Fear Understanding Behavioral Finance and the

Psychology of Investing Boston MA Harvard Business School Press

Stokes A F Kemper K amp Kite K (1997) Aeronautical decision making cue recognition and

expertise under time pressure In C E Zsambok amp G Klein (Eds) Naturalistic Decision

Making pp 183-196 Mahwah NJ Erlbaum

Tamir M (2005) Dont worry be happy Neuroticism trait-consistent affect regulation

and performance Journal of Personality and Social Psychology 89 (3) 449 ndash

461

Thaler R H (1985) Mental accounting and consumer choice Marketing Science 4(3) 199-214

Thaler R H (1993) Advances In Behavioral Finance New York Russel Sage Foundation

Thaler R H (1999) Mental accounting matters Journal of Behavioral Decision Making 12(3)

183-206

Tiedens L amp Linton S (2001) Judgment under emotional certainty and uncertainty the effects

of specific emotions on information processing Journal of Personality and Social

Psychology 81(6) 973-988

Todd P M amp Gigerenzer G (2007) Environments that make us smart Ecological rationality

Current Directions in Psychological Science 16 167-171

Totterdell P Briner R B Parkinson B amp Reynolds S (1996) Fingerprinting time series

dynamic patterns in self-report and performance measures uncovered by a graphical non-

linear method British Journal of Psychology 87(1) 43-60

Weber M amp Welfens F (2008) Splitting the Disposition Effect Asymmetric Reactions

Towards bdquoSelling winners‟ and bdquoHolding Losers‟ Working Paper University of

Mannheim

Wright WF amp Bower GH (1992) Mood effects on subjective probability assessment

Organizational Behavior and Human Decision Processes 52 276ndash91

28

possibly productive avenue for future research We do not have evidence of performance

outcomes of predictive uses of empathy in this manner but our findings are consistent with

arguments that the evolution of the human brain has been significantly driven by the need to

predict the behavior of other humans often via subtle cues (eg Nicholson 2000)

We suggest that the identification of links between decision-making performance and

emotion regulation in this study has important implications for theory development in two key

fields First while somewhat tacit in much of the literature the implication of many claims in the

decision-making and behavioral finance literatures is that a range of key decision-making biases

are underpinned by mechanisms which involve emotion processes One relevant explicit example

is Thalerlsquos (1985 1999) account of the role of hedonic editinglsquo in mental accounting and the

disposition effect (the tendency to hold losing assets longer than winning assets) This explains

key biases in terms of the desire to maintain positive hedonic tone There is evidence too of

interpersonal variation in propensity to exhibit such biases for example investors vary in their

propensity to exhibit the disposition effect (Shapira amp Venezia 2001 Weber amp Welfens 2008)

In this study we have seen that traders seek to regulate emotions in order to avoid decision biases

and that higher performing traders typically exhibit more sophisticated emotion regulation

strategies This suggests that it would be productive to investigate the role of emotion regulation

as one key source of interpersonal variation in susceptibility to a range of decision biases

A second implication concerns the role of emotion in expert performance While much

attention has been paid to the nature of cognition in expert performance the expertise literature

hardly considers the role of emotion For example examining the index of the Cambridge

Handbook of Expertise and Expert Performance (Ericsson et al 2006) reveals very few

references to emotion and these are peripheral to the main arguments of the chapters which

contain them Our research suggests first that effective emotion regulation may be an important

29

facet of expert performance and second that greater attention should be paid to the interactions

between emotion emotion regulation and expert intuition Further research could test the

proposition that effective expert intuition is reduced by reliance on defensive emotion regulation

strategies

While our study points to the importance of intuition in traderslsquo work it may be that the

relative importance of intuition and analysis vary with task characteristics such as time span of

decision-making Certainly this seemed to be the view of several senior managers with

responsibility for allocating traders to trading roles The interplay that expert traders described

between intuition and analysis is also intriguing The importance of context to the role of affect

in decision-making has been noted in prior research (Forgas amp George 2001) Further research

could usefully explore this aspect of traderslsquo expertise

This study also contains some potentially important implications for practice First it

points to the importance of learned strategies for emotion regulation and the need for effective

support for their development Second our data directly and indirectly point to the key role of

management in this process Our findings suggest that there may be considerable benefits to

skilled managerial interventions that help to steer effective emotion regulation and support

inexperienced traders in developing emotion regulation skills Additionally managers may be

able to help traders to understand the productive role that critically engaged experience-based

intuition may play in decision-making Our evidence suggests that many high performing traders

deploy a reflective and critical approach to the use and development of intuition well-founded in

experience Managers could help to guide this process through coaching The contextual

dependence of high quality intuitions suggests they are quite domain specific and may not

transfer across contexts As several informants told us this is especially true for traders operating

under different market conditions

30

We heard repeated concerns from senior managers who worried about traders who had

not seen a bear market and would not operate well when that occurred We also heard many

stories of people transferring between trading areas and needing time to re-contextualize

expertise before their intuitions could be considered reliable Thus managers have a role in

helping traders to extend the boundaries of their expertise Given recent events in financial

markets our findings may be relevant to an understanding of how traders react under massively

changed trading conditions and how those reactions might either contribute to or result from

market volatility

This research has some important limitations First although we have argued for the

importance of an account of emotion that includes the experience of emotion as Pham (2004

368) notes the affective system is focused on the present Thus people can be poor at recalling or

predicting emotions There are limits to the human capacity to introspect on emotion processes

and to recall the experience of emotion These limits are also subject to wide individual

differences The capacity for introspection and recall will also vary between individuals For this

reason studies such as ours need to be complemented with more physiologically based research

as well as further qualitative and quantitative studies

Second as in all work contexts traders subscribe to norms of socially sanctioned

behavior and to common narratives about the nature of their work We have not treated emotional

labor as a primary component of traderslsquo work and performance The majority of work

interactions are carried out through highly abbreviated electronic exchanges which provide a poor

medium for the communication of emotion However there is a sense in which traders engage in

emotional labor since especially for novices there are social pressures to comply with display

rules which emphasize the avoidance of displays of strong emotion One common narrative

thread that ran though many traderslsquo accounts of their work was a representation of trading work

31

as principally concerned with rational analysis from which emotions are a dangerous distraction

This narrative seemed particularly strong in the accounts of less experienced traders Although as

we have seen the mask would often slip as they discussed their work Some traderslsquo accounts

were clearly colored by a desire to conform to this mode of self-presentation In consequence it is

possible that in our interviews and during data analysis we were at times unable to distinguish

effectively between defensive denial of emotion and effective regulation of emotion This would

be another avenue for future research

To conclude we know that emotions are a rich source of experience in everyday life but

at the same time in work contexts they can be a source of vulnerability a wayward influence over

judgment and a source of disturbance to process The more ―rational-economic such

environments are the more likely we are to hold such beliefs (Nicholson 2000) Our research

illustrates that this position is false or at best short-sighted In the hyper-rational world of

trading in financial markets we did find some evidence that emotions disturbed performance but

mostly among the inexperienced and un-reflective traders The best traders are able to regulate

emotions effectively and incorporate relevant emotions as information ndash signals or a kind of

radar that contain information about risks what is going on in the minds of others and the weight

and relevance to be accorded to onelsquos own past experience

32

REFERENCES

Bargh J A Chen M amp Burrows L (1996) Automaticity of social behavior Direct effects of

trait construct and stereotype activation on action Journal of Personality and Social

Psychology 71 230-244

Baumeister R F Bratslavsky E Muraven M amp Tice D M (1998) Ego depletion Is the

active self a limited resource Journal of Personality and Social Psychology 74 1252-

1265

Bechara A Damasio A Tranel D amp Damasio A R (1997) Deciding advantageously before

knowing the advantageous strategy Science 275 1293-1295

Bower G H (1981) Mood and memory American Psychologist 36 129 ndash 148

Bower G H (1991) Mood congruity of social judgments In J P Forgas (Ed) Emotion and

social judgments (pp 31ndash53) Oxford Pergamon Press

Braun V amp Clarke V (2006) Using thematic analysis in psychology Qualitative Research in

Psychology 3(2) 77-101

Buck R (1999) The biological affects a typology Psychological Reveiw 106 301-336

Damasio A R (1994) Descartes‟ error Emotion reason and the human brain New York

Putnam

Dane E amp Pratt M G (2007) Exploring intuition and its role in managerial decision making

The Academy of Management Review 32 33-54

De Bondt W Palm F amp Wolff C (2004) Introduction to the special issue on behavioral

finance Journal of Empirical Finance 11 423-427

Dreyfus H amp Dreyfus S (2005) Expertise in real world contexts Organization Studies 26

779-792

Epstein S Pacini R Denes-Raj V amp Heier H (1996) Individual differences in intuitive-

experiential and analytical-rational thinking styles Journal of Personality and Social

Psychology 71 390-405

Ericsson K A Krampe R T amp Tesch-Roemer C (1993) The role of deliberate practice in the

acquisition of expert performance Psychological Review 100 363-406

Ericsson K A (2006) An introduction to the Cambridge Handbook of Expertise and Expert

Performance its development organization and content In K A Ericsson amp N Charness

amp P J Feltovich amp R R Hoffman (Eds) The Cambridge Handbook of Expertise and

Expert Performance 1st ed 3-20 Cambridge Cambridge University Press

Fama E F (1991) Efficient Capital Markets II The Journal of Finance 46 1575-1617

Fama E F (1998) Market efficiency long-term returns and behavioral finance Journal of

Financial Economics Vol 49 283-306

Fenton-OCreevy M Nicholson N Soane E amp Willman P (2005) Traders Risks Decisions

and Management in Financial Markets Oxford Oxford University Press

Finucane M L Alhakami A Slovic P amp Johnson S M (2000) The affect heuristic in

judgments of risks and benefits Journal of Behavioral Decision Making 13(1) 1-17

Forgas JP amp George JM (2001) Affective influences on judgments and behavior in

organizations An information processing perspective Organizational Behavior and

Human Decision Processes 86(1) 3-34

Grandey AA (2000) Emotion Regulation in the Workplace A new way to conceptualize

Emotional Labor Journal of Occupational Health Psychology 5(1) 95-110

33

Grandey A A (2003) When the show must go on surface acting and deep acting as

determinants of emotional exhaustion and peer-rated service delivery Academy of

Management Journal 46 86-96

Gray JA (1999) Cognition emotion conscious experience and the brain In T Dalgleish and

MJ Power (Eds) Handbook of Cognition and Emotion (pp83-102) Chichester England

Wiley

Gross J (2002) Emotion regulation affective cognitive and social consequences

Psychophysiology 39 281

Gross J J amp John O P (2003) Individual differences in two emotion regulation processes

Implications for affect relationships and well-being Journal of Personality and Social

Psychology 85(2) 348-362

Gross J J amp Thompson R A (2007) Emotion regulation Conceptual foundations In J J

Gross (Ed) Handbook of emotion regulation New York NY Guilford Press

Isen A M Shalker T E Clark M amp Karp L (1978) Affect accessibility of material in

memory and behavior A cognitive loop Journal of Personality and Social Psychology

36 1-12

Johnson E amp Tversky A (1983) Affect generalization and the perception of risk Journal of

Personality and Social Psychology 45(1) 20-31

Kavanaugh D amp Bower G (1985) Mood and self-efficacy Impact of job and sadness on

perceived capabilities Cognitive Therapy and Research 9 507-525

Klein G A Calderwood R amp Clinton Cirocco A (1986) Rapid decision-making on the

fireground Human Factors and Ergonomics Society 30th Annual Meeting Vol 1 576-

580

Knorr-Cetina K amp Brugger U (2002) Traders Engagement with Markets A Postsocial

Relationship Theory Culture and Society 19(5-6) 161-185

Labouvie-Vief G (2003) Dynamic integration Affect cognition and the self in adulthood

Current Directions in Psychological Science 12 201-206

Lerner J S amp Keltner D (2001) Fear anger and risk Journal of Personality and Social

Psychology 81(1) 146-159

Lerner J S Small D A amp Loewenstein G (2004) Heart strings and purse strings Carryover

effects of emotions on economic decisions Psychological Science 15(5) 337-341

Lo A Repin D amp Steenbarger B (2005) Fear and greed in financial markets A clinical study

of day traders American Economic Review 95 352-359

Lo A W amp Repin D V (2002) The Psychophysiology of Real-Time Financial Risk

Processing Journal of Cognitive Neuroscience 14 323-339

MacKenzie D (2006) An Engine Not A Camera How Financial Models Shape Markets

Cambridge Mass MIT Press

Mayer JD amp Hanson A (1995) Mood-congruent judgment over time Personality and Social

Psychology Bulletin 21 237-244

Mayer JD DiPaolo M and Salovey P (1990) Perceiving affective content in ambiguous

visual stimuli a component of emotional intelligence Journal of Personality Assessment

54 772-781

Miller G (2003) The cognitive revolution a historical perspective Trends in Cognitive Science

7 141

Muraven M amp Baumeister R F (2000) Self-regulation and depletion of limited resources

Does self-control resemble a muscle Psychological Bulletin 126 247-259

Nicholson N (2000) Managing the Human Animal London ThomsonTexere

34

Peterson R L (2007) Affect and financial decision-making How neuroscience can inform

market participants The Journal of Behavioral Finance 8(2) 70-78

Pham M T (2004) The logic of feeling Journal of Consumer Psychology 14 360-369

Phelps E A (2006) Emotion and cognition Insights from studies of the human amygdala

Annual Review of Psychology 57 27-53

Sayer A (1997) Essentialism social constructionism and beyond The Sociological Review 45

453-487

Shapira Z amp Venezia I (2001) Patterns of behavior of professionally managed and

independent investors Journal of Banking and Finance 25 1573ndash1587

Schunk D amp Betsch C (2006) Explaining the heterogeneity in utility functions by individual

differences in decision modes Journal of Economic Psychology 27 386-401

Schwager J D (1993) Market Wizards Interviews with Top Traders New York Collins

Schwarz N amp Clore G L (1983) Mood misattribution and judgments of well-being

Informative and directive functions of affective states Journal of Personality and Social

Psychology 45 513-523

Seo M G Barrett L F amp Bartunek J M (2004) The role of affective experience in work

motivation Academy of Management Review 29 423-439

Seo M G amp Barrett L F (2007) Being emotional during decision makingmdashgood or bad An

empirical investigation The Academy of Management Journal 50 923-940

Shefrin H (2000) Beyond Greed and Fear Understanding Behavioral Finance and the

Psychology of Investing Boston MA Harvard Business School Press

Stokes A F Kemper K amp Kite K (1997) Aeronautical decision making cue recognition and

expertise under time pressure In C E Zsambok amp G Klein (Eds) Naturalistic Decision

Making pp 183-196 Mahwah NJ Erlbaum

Tamir M (2005) Dont worry be happy Neuroticism trait-consistent affect regulation

and performance Journal of Personality and Social Psychology 89 (3) 449 ndash

461

Thaler R H (1985) Mental accounting and consumer choice Marketing Science 4(3) 199-214

Thaler R H (1993) Advances In Behavioral Finance New York Russel Sage Foundation

Thaler R H (1999) Mental accounting matters Journal of Behavioral Decision Making 12(3)

183-206

Tiedens L amp Linton S (2001) Judgment under emotional certainty and uncertainty the effects

of specific emotions on information processing Journal of Personality and Social

Psychology 81(6) 973-988

Todd P M amp Gigerenzer G (2007) Environments that make us smart Ecological rationality

Current Directions in Psychological Science 16 167-171

Totterdell P Briner R B Parkinson B amp Reynolds S (1996) Fingerprinting time series

dynamic patterns in self-report and performance measures uncovered by a graphical non-

linear method British Journal of Psychology 87(1) 43-60

Weber M amp Welfens F (2008) Splitting the Disposition Effect Asymmetric Reactions

Towards bdquoSelling winners‟ and bdquoHolding Losers‟ Working Paper University of

Mannheim

Wright WF amp Bower GH (1992) Mood effects on subjective probability assessment

Organizational Behavior and Human Decision Processes 52 276ndash91

29

facet of expert performance and second that greater attention should be paid to the interactions

between emotion emotion regulation and expert intuition Further research could test the

proposition that effective expert intuition is reduced by reliance on defensive emotion regulation

strategies

While our study points to the importance of intuition in traderslsquo work it may be that the

relative importance of intuition and analysis vary with task characteristics such as time span of

decision-making Certainly this seemed to be the view of several senior managers with

responsibility for allocating traders to trading roles The interplay that expert traders described

between intuition and analysis is also intriguing The importance of context to the role of affect

in decision-making has been noted in prior research (Forgas amp George 2001) Further research

could usefully explore this aspect of traderslsquo expertise

This study also contains some potentially important implications for practice First it

points to the importance of learned strategies for emotion regulation and the need for effective

support for their development Second our data directly and indirectly point to the key role of

management in this process Our findings suggest that there may be considerable benefits to

skilled managerial interventions that help to steer effective emotion regulation and support

inexperienced traders in developing emotion regulation skills Additionally managers may be

able to help traders to understand the productive role that critically engaged experience-based

intuition may play in decision-making Our evidence suggests that many high performing traders

deploy a reflective and critical approach to the use and development of intuition well-founded in

experience Managers could help to guide this process through coaching The contextual

dependence of high quality intuitions suggests they are quite domain specific and may not

transfer across contexts As several informants told us this is especially true for traders operating

under different market conditions

30

We heard repeated concerns from senior managers who worried about traders who had

not seen a bear market and would not operate well when that occurred We also heard many

stories of people transferring between trading areas and needing time to re-contextualize

expertise before their intuitions could be considered reliable Thus managers have a role in

helping traders to extend the boundaries of their expertise Given recent events in financial

markets our findings may be relevant to an understanding of how traders react under massively

changed trading conditions and how those reactions might either contribute to or result from

market volatility

This research has some important limitations First although we have argued for the

importance of an account of emotion that includes the experience of emotion as Pham (2004

368) notes the affective system is focused on the present Thus people can be poor at recalling or

predicting emotions There are limits to the human capacity to introspect on emotion processes

and to recall the experience of emotion These limits are also subject to wide individual

differences The capacity for introspection and recall will also vary between individuals For this

reason studies such as ours need to be complemented with more physiologically based research

as well as further qualitative and quantitative studies

Second as in all work contexts traders subscribe to norms of socially sanctioned

behavior and to common narratives about the nature of their work We have not treated emotional

labor as a primary component of traderslsquo work and performance The majority of work

interactions are carried out through highly abbreviated electronic exchanges which provide a poor

medium for the communication of emotion However there is a sense in which traders engage in

emotional labor since especially for novices there are social pressures to comply with display

rules which emphasize the avoidance of displays of strong emotion One common narrative

thread that ran though many traderslsquo accounts of their work was a representation of trading work

31

as principally concerned with rational analysis from which emotions are a dangerous distraction

This narrative seemed particularly strong in the accounts of less experienced traders Although as

we have seen the mask would often slip as they discussed their work Some traderslsquo accounts

were clearly colored by a desire to conform to this mode of self-presentation In consequence it is

possible that in our interviews and during data analysis we were at times unable to distinguish

effectively between defensive denial of emotion and effective regulation of emotion This would

be another avenue for future research

To conclude we know that emotions are a rich source of experience in everyday life but

at the same time in work contexts they can be a source of vulnerability a wayward influence over

judgment and a source of disturbance to process The more ―rational-economic such

environments are the more likely we are to hold such beliefs (Nicholson 2000) Our research

illustrates that this position is false or at best short-sighted In the hyper-rational world of

trading in financial markets we did find some evidence that emotions disturbed performance but

mostly among the inexperienced and un-reflective traders The best traders are able to regulate

emotions effectively and incorporate relevant emotions as information ndash signals or a kind of

radar that contain information about risks what is going on in the minds of others and the weight

and relevance to be accorded to onelsquos own past experience

32

REFERENCES

Bargh J A Chen M amp Burrows L (1996) Automaticity of social behavior Direct effects of

trait construct and stereotype activation on action Journal of Personality and Social

Psychology 71 230-244

Baumeister R F Bratslavsky E Muraven M amp Tice D M (1998) Ego depletion Is the

active self a limited resource Journal of Personality and Social Psychology 74 1252-

1265

Bechara A Damasio A Tranel D amp Damasio A R (1997) Deciding advantageously before

knowing the advantageous strategy Science 275 1293-1295

Bower G H (1981) Mood and memory American Psychologist 36 129 ndash 148

Bower G H (1991) Mood congruity of social judgments In J P Forgas (Ed) Emotion and

social judgments (pp 31ndash53) Oxford Pergamon Press

Braun V amp Clarke V (2006) Using thematic analysis in psychology Qualitative Research in

Psychology 3(2) 77-101

Buck R (1999) The biological affects a typology Psychological Reveiw 106 301-336

Damasio A R (1994) Descartes‟ error Emotion reason and the human brain New York

Putnam

Dane E amp Pratt M G (2007) Exploring intuition and its role in managerial decision making

The Academy of Management Review 32 33-54

De Bondt W Palm F amp Wolff C (2004) Introduction to the special issue on behavioral

finance Journal of Empirical Finance 11 423-427

Dreyfus H amp Dreyfus S (2005) Expertise in real world contexts Organization Studies 26

779-792

Epstein S Pacini R Denes-Raj V amp Heier H (1996) Individual differences in intuitive-

experiential and analytical-rational thinking styles Journal of Personality and Social

Psychology 71 390-405

Ericsson K A Krampe R T amp Tesch-Roemer C (1993) The role of deliberate practice in the

acquisition of expert performance Psychological Review 100 363-406

Ericsson K A (2006) An introduction to the Cambridge Handbook of Expertise and Expert

Performance its development organization and content In K A Ericsson amp N Charness

amp P J Feltovich amp R R Hoffman (Eds) The Cambridge Handbook of Expertise and

Expert Performance 1st ed 3-20 Cambridge Cambridge University Press

Fama E F (1991) Efficient Capital Markets II The Journal of Finance 46 1575-1617

Fama E F (1998) Market efficiency long-term returns and behavioral finance Journal of

Financial Economics Vol 49 283-306

Fenton-OCreevy M Nicholson N Soane E amp Willman P (2005) Traders Risks Decisions

and Management in Financial Markets Oxford Oxford University Press

Finucane M L Alhakami A Slovic P amp Johnson S M (2000) The affect heuristic in

judgments of risks and benefits Journal of Behavioral Decision Making 13(1) 1-17

Forgas JP amp George JM (2001) Affective influences on judgments and behavior in

organizations An information processing perspective Organizational Behavior and

Human Decision Processes 86(1) 3-34

Grandey AA (2000) Emotion Regulation in the Workplace A new way to conceptualize

Emotional Labor Journal of Occupational Health Psychology 5(1) 95-110

33

Grandey A A (2003) When the show must go on surface acting and deep acting as

determinants of emotional exhaustion and peer-rated service delivery Academy of

Management Journal 46 86-96

Gray JA (1999) Cognition emotion conscious experience and the brain In T Dalgleish and

MJ Power (Eds) Handbook of Cognition and Emotion (pp83-102) Chichester England

Wiley

Gross J (2002) Emotion regulation affective cognitive and social consequences

Psychophysiology 39 281

Gross J J amp John O P (2003) Individual differences in two emotion regulation processes

Implications for affect relationships and well-being Journal of Personality and Social

Psychology 85(2) 348-362

Gross J J amp Thompson R A (2007) Emotion regulation Conceptual foundations In J J

Gross (Ed) Handbook of emotion regulation New York NY Guilford Press

Isen A M Shalker T E Clark M amp Karp L (1978) Affect accessibility of material in

memory and behavior A cognitive loop Journal of Personality and Social Psychology

36 1-12

Johnson E amp Tversky A (1983) Affect generalization and the perception of risk Journal of

Personality and Social Psychology 45(1) 20-31

Kavanaugh D amp Bower G (1985) Mood and self-efficacy Impact of job and sadness on

perceived capabilities Cognitive Therapy and Research 9 507-525

Klein G A Calderwood R amp Clinton Cirocco A (1986) Rapid decision-making on the

fireground Human Factors and Ergonomics Society 30th Annual Meeting Vol 1 576-

580

Knorr-Cetina K amp Brugger U (2002) Traders Engagement with Markets A Postsocial

Relationship Theory Culture and Society 19(5-6) 161-185

Labouvie-Vief G (2003) Dynamic integration Affect cognition and the self in adulthood

Current Directions in Psychological Science 12 201-206

Lerner J S amp Keltner D (2001) Fear anger and risk Journal of Personality and Social

Psychology 81(1) 146-159

Lerner J S Small D A amp Loewenstein G (2004) Heart strings and purse strings Carryover

effects of emotions on economic decisions Psychological Science 15(5) 337-341

Lo A Repin D amp Steenbarger B (2005) Fear and greed in financial markets A clinical study

of day traders American Economic Review 95 352-359

Lo A W amp Repin D V (2002) The Psychophysiology of Real-Time Financial Risk

Processing Journal of Cognitive Neuroscience 14 323-339

MacKenzie D (2006) An Engine Not A Camera How Financial Models Shape Markets

Cambridge Mass MIT Press

Mayer JD amp Hanson A (1995) Mood-congruent judgment over time Personality and Social

Psychology Bulletin 21 237-244

Mayer JD DiPaolo M and Salovey P (1990) Perceiving affective content in ambiguous

visual stimuli a component of emotional intelligence Journal of Personality Assessment

54 772-781

Miller G (2003) The cognitive revolution a historical perspective Trends in Cognitive Science

7 141

Muraven M amp Baumeister R F (2000) Self-regulation and depletion of limited resources

Does self-control resemble a muscle Psychological Bulletin 126 247-259

Nicholson N (2000) Managing the Human Animal London ThomsonTexere

34

Peterson R L (2007) Affect and financial decision-making How neuroscience can inform

market participants The Journal of Behavioral Finance 8(2) 70-78

Pham M T (2004) The logic of feeling Journal of Consumer Psychology 14 360-369

Phelps E A (2006) Emotion and cognition Insights from studies of the human amygdala

Annual Review of Psychology 57 27-53

Sayer A (1997) Essentialism social constructionism and beyond The Sociological Review 45

453-487

Shapira Z amp Venezia I (2001) Patterns of behavior of professionally managed and

independent investors Journal of Banking and Finance 25 1573ndash1587

Schunk D amp Betsch C (2006) Explaining the heterogeneity in utility functions by individual

differences in decision modes Journal of Economic Psychology 27 386-401

Schwager J D (1993) Market Wizards Interviews with Top Traders New York Collins

Schwarz N amp Clore G L (1983) Mood misattribution and judgments of well-being

Informative and directive functions of affective states Journal of Personality and Social

Psychology 45 513-523

Seo M G Barrett L F amp Bartunek J M (2004) The role of affective experience in work

motivation Academy of Management Review 29 423-439

Seo M G amp Barrett L F (2007) Being emotional during decision makingmdashgood or bad An

empirical investigation The Academy of Management Journal 50 923-940

Shefrin H (2000) Beyond Greed and Fear Understanding Behavioral Finance and the

Psychology of Investing Boston MA Harvard Business School Press

Stokes A F Kemper K amp Kite K (1997) Aeronautical decision making cue recognition and

expertise under time pressure In C E Zsambok amp G Klein (Eds) Naturalistic Decision

Making pp 183-196 Mahwah NJ Erlbaum

Tamir M (2005) Dont worry be happy Neuroticism trait-consistent affect regulation

and performance Journal of Personality and Social Psychology 89 (3) 449 ndash

461

Thaler R H (1985) Mental accounting and consumer choice Marketing Science 4(3) 199-214

Thaler R H (1993) Advances In Behavioral Finance New York Russel Sage Foundation

Thaler R H (1999) Mental accounting matters Journal of Behavioral Decision Making 12(3)

183-206

Tiedens L amp Linton S (2001) Judgment under emotional certainty and uncertainty the effects

of specific emotions on information processing Journal of Personality and Social

Psychology 81(6) 973-988

Todd P M amp Gigerenzer G (2007) Environments that make us smart Ecological rationality

Current Directions in Psychological Science 16 167-171

Totterdell P Briner R B Parkinson B amp Reynolds S (1996) Fingerprinting time series

dynamic patterns in self-report and performance measures uncovered by a graphical non-

linear method British Journal of Psychology 87(1) 43-60

Weber M amp Welfens F (2008) Splitting the Disposition Effect Asymmetric Reactions

Towards bdquoSelling winners‟ and bdquoHolding Losers‟ Working Paper University of

Mannheim

Wright WF amp Bower GH (1992) Mood effects on subjective probability assessment

Organizational Behavior and Human Decision Processes 52 276ndash91

30

We heard repeated concerns from senior managers who worried about traders who had

not seen a bear market and would not operate well when that occurred We also heard many

stories of people transferring between trading areas and needing time to re-contextualize

expertise before their intuitions could be considered reliable Thus managers have a role in

helping traders to extend the boundaries of their expertise Given recent events in financial

markets our findings may be relevant to an understanding of how traders react under massively

changed trading conditions and how those reactions might either contribute to or result from

market volatility

This research has some important limitations First although we have argued for the

importance of an account of emotion that includes the experience of emotion as Pham (2004

368) notes the affective system is focused on the present Thus people can be poor at recalling or

predicting emotions There are limits to the human capacity to introspect on emotion processes

and to recall the experience of emotion These limits are also subject to wide individual

differences The capacity for introspection and recall will also vary between individuals For this

reason studies such as ours need to be complemented with more physiologically based research

as well as further qualitative and quantitative studies

Second as in all work contexts traders subscribe to norms of socially sanctioned

behavior and to common narratives about the nature of their work We have not treated emotional

labor as a primary component of traderslsquo work and performance The majority of work

interactions are carried out through highly abbreviated electronic exchanges which provide a poor

medium for the communication of emotion However there is a sense in which traders engage in

emotional labor since especially for novices there are social pressures to comply with display

rules which emphasize the avoidance of displays of strong emotion One common narrative

thread that ran though many traderslsquo accounts of their work was a representation of trading work

31

as principally concerned with rational analysis from which emotions are a dangerous distraction

This narrative seemed particularly strong in the accounts of less experienced traders Although as

we have seen the mask would often slip as they discussed their work Some traderslsquo accounts

were clearly colored by a desire to conform to this mode of self-presentation In consequence it is

possible that in our interviews and during data analysis we were at times unable to distinguish

effectively between defensive denial of emotion and effective regulation of emotion This would

be another avenue for future research

To conclude we know that emotions are a rich source of experience in everyday life but

at the same time in work contexts they can be a source of vulnerability a wayward influence over

judgment and a source of disturbance to process The more ―rational-economic such

environments are the more likely we are to hold such beliefs (Nicholson 2000) Our research

illustrates that this position is false or at best short-sighted In the hyper-rational world of

trading in financial markets we did find some evidence that emotions disturbed performance but

mostly among the inexperienced and un-reflective traders The best traders are able to regulate

emotions effectively and incorporate relevant emotions as information ndash signals or a kind of

radar that contain information about risks what is going on in the minds of others and the weight

and relevance to be accorded to onelsquos own past experience

32

REFERENCES

Bargh J A Chen M amp Burrows L (1996) Automaticity of social behavior Direct effects of

trait construct and stereotype activation on action Journal of Personality and Social

Psychology 71 230-244

Baumeister R F Bratslavsky E Muraven M amp Tice D M (1998) Ego depletion Is the

active self a limited resource Journal of Personality and Social Psychology 74 1252-

1265

Bechara A Damasio A Tranel D amp Damasio A R (1997) Deciding advantageously before

knowing the advantageous strategy Science 275 1293-1295

Bower G H (1981) Mood and memory American Psychologist 36 129 ndash 148

Bower G H (1991) Mood congruity of social judgments In J P Forgas (Ed) Emotion and

social judgments (pp 31ndash53) Oxford Pergamon Press

Braun V amp Clarke V (2006) Using thematic analysis in psychology Qualitative Research in

Psychology 3(2) 77-101

Buck R (1999) The biological affects a typology Psychological Reveiw 106 301-336

Damasio A R (1994) Descartes‟ error Emotion reason and the human brain New York

Putnam

Dane E amp Pratt M G (2007) Exploring intuition and its role in managerial decision making

The Academy of Management Review 32 33-54

De Bondt W Palm F amp Wolff C (2004) Introduction to the special issue on behavioral

finance Journal of Empirical Finance 11 423-427

Dreyfus H amp Dreyfus S (2005) Expertise in real world contexts Organization Studies 26

779-792

Epstein S Pacini R Denes-Raj V amp Heier H (1996) Individual differences in intuitive-

experiential and analytical-rational thinking styles Journal of Personality and Social

Psychology 71 390-405

Ericsson K A Krampe R T amp Tesch-Roemer C (1993) The role of deliberate practice in the

acquisition of expert performance Psychological Review 100 363-406

Ericsson K A (2006) An introduction to the Cambridge Handbook of Expertise and Expert

Performance its development organization and content In K A Ericsson amp N Charness

amp P J Feltovich amp R R Hoffman (Eds) The Cambridge Handbook of Expertise and

Expert Performance 1st ed 3-20 Cambridge Cambridge University Press

Fama E F (1991) Efficient Capital Markets II The Journal of Finance 46 1575-1617

Fama E F (1998) Market efficiency long-term returns and behavioral finance Journal of

Financial Economics Vol 49 283-306

Fenton-OCreevy M Nicholson N Soane E amp Willman P (2005) Traders Risks Decisions

and Management in Financial Markets Oxford Oxford University Press

Finucane M L Alhakami A Slovic P amp Johnson S M (2000) The affect heuristic in

judgments of risks and benefits Journal of Behavioral Decision Making 13(1) 1-17

Forgas JP amp George JM (2001) Affective influences on judgments and behavior in

organizations An information processing perspective Organizational Behavior and

Human Decision Processes 86(1) 3-34

Grandey AA (2000) Emotion Regulation in the Workplace A new way to conceptualize

Emotional Labor Journal of Occupational Health Psychology 5(1) 95-110

33

Grandey A A (2003) When the show must go on surface acting and deep acting as

determinants of emotional exhaustion and peer-rated service delivery Academy of

Management Journal 46 86-96

Gray JA (1999) Cognition emotion conscious experience and the brain In T Dalgleish and

MJ Power (Eds) Handbook of Cognition and Emotion (pp83-102) Chichester England

Wiley

Gross J (2002) Emotion regulation affective cognitive and social consequences

Psychophysiology 39 281

Gross J J amp John O P (2003) Individual differences in two emotion regulation processes

Implications for affect relationships and well-being Journal of Personality and Social

Psychology 85(2) 348-362

Gross J J amp Thompson R A (2007) Emotion regulation Conceptual foundations In J J

Gross (Ed) Handbook of emotion regulation New York NY Guilford Press

Isen A M Shalker T E Clark M amp Karp L (1978) Affect accessibility of material in

memory and behavior A cognitive loop Journal of Personality and Social Psychology

36 1-12

Johnson E amp Tversky A (1983) Affect generalization and the perception of risk Journal of

Personality and Social Psychology 45(1) 20-31

Kavanaugh D amp Bower G (1985) Mood and self-efficacy Impact of job and sadness on

perceived capabilities Cognitive Therapy and Research 9 507-525

Klein G A Calderwood R amp Clinton Cirocco A (1986) Rapid decision-making on the

fireground Human Factors and Ergonomics Society 30th Annual Meeting Vol 1 576-

580

Knorr-Cetina K amp Brugger U (2002) Traders Engagement with Markets A Postsocial

Relationship Theory Culture and Society 19(5-6) 161-185

Labouvie-Vief G (2003) Dynamic integration Affect cognition and the self in adulthood

Current Directions in Psychological Science 12 201-206

Lerner J S amp Keltner D (2001) Fear anger and risk Journal of Personality and Social

Psychology 81(1) 146-159

Lerner J S Small D A amp Loewenstein G (2004) Heart strings and purse strings Carryover

effects of emotions on economic decisions Psychological Science 15(5) 337-341

Lo A Repin D amp Steenbarger B (2005) Fear and greed in financial markets A clinical study

of day traders American Economic Review 95 352-359

Lo A W amp Repin D V (2002) The Psychophysiology of Real-Time Financial Risk

Processing Journal of Cognitive Neuroscience 14 323-339

MacKenzie D (2006) An Engine Not A Camera How Financial Models Shape Markets

Cambridge Mass MIT Press

Mayer JD amp Hanson A (1995) Mood-congruent judgment over time Personality and Social

Psychology Bulletin 21 237-244

Mayer JD DiPaolo M and Salovey P (1990) Perceiving affective content in ambiguous

visual stimuli a component of emotional intelligence Journal of Personality Assessment

54 772-781

Miller G (2003) The cognitive revolution a historical perspective Trends in Cognitive Science

7 141

Muraven M amp Baumeister R F (2000) Self-regulation and depletion of limited resources

Does self-control resemble a muscle Psychological Bulletin 126 247-259

Nicholson N (2000) Managing the Human Animal London ThomsonTexere

34

Peterson R L (2007) Affect and financial decision-making How neuroscience can inform

market participants The Journal of Behavioral Finance 8(2) 70-78

Pham M T (2004) The logic of feeling Journal of Consumer Psychology 14 360-369

Phelps E A (2006) Emotion and cognition Insights from studies of the human amygdala

Annual Review of Psychology 57 27-53

Sayer A (1997) Essentialism social constructionism and beyond The Sociological Review 45

453-487

Shapira Z amp Venezia I (2001) Patterns of behavior of professionally managed and

independent investors Journal of Banking and Finance 25 1573ndash1587

Schunk D amp Betsch C (2006) Explaining the heterogeneity in utility functions by individual

differences in decision modes Journal of Economic Psychology 27 386-401

Schwager J D (1993) Market Wizards Interviews with Top Traders New York Collins

Schwarz N amp Clore G L (1983) Mood misattribution and judgments of well-being

Informative and directive functions of affective states Journal of Personality and Social

Psychology 45 513-523

Seo M G Barrett L F amp Bartunek J M (2004) The role of affective experience in work

motivation Academy of Management Review 29 423-439

Seo M G amp Barrett L F (2007) Being emotional during decision makingmdashgood or bad An

empirical investigation The Academy of Management Journal 50 923-940

Shefrin H (2000) Beyond Greed and Fear Understanding Behavioral Finance and the

Psychology of Investing Boston MA Harvard Business School Press

Stokes A F Kemper K amp Kite K (1997) Aeronautical decision making cue recognition and

expertise under time pressure In C E Zsambok amp G Klein (Eds) Naturalistic Decision

Making pp 183-196 Mahwah NJ Erlbaum

Tamir M (2005) Dont worry be happy Neuroticism trait-consistent affect regulation

and performance Journal of Personality and Social Psychology 89 (3) 449 ndash

461

Thaler R H (1985) Mental accounting and consumer choice Marketing Science 4(3) 199-214

Thaler R H (1993) Advances In Behavioral Finance New York Russel Sage Foundation

Thaler R H (1999) Mental accounting matters Journal of Behavioral Decision Making 12(3)

183-206

Tiedens L amp Linton S (2001) Judgment under emotional certainty and uncertainty the effects

of specific emotions on information processing Journal of Personality and Social

Psychology 81(6) 973-988

Todd P M amp Gigerenzer G (2007) Environments that make us smart Ecological rationality

Current Directions in Psychological Science 16 167-171

Totterdell P Briner R B Parkinson B amp Reynolds S (1996) Fingerprinting time series

dynamic patterns in self-report and performance measures uncovered by a graphical non-

linear method British Journal of Psychology 87(1) 43-60

Weber M amp Welfens F (2008) Splitting the Disposition Effect Asymmetric Reactions

Towards bdquoSelling winners‟ and bdquoHolding Losers‟ Working Paper University of

Mannheim

Wright WF amp Bower GH (1992) Mood effects on subjective probability assessment

Organizational Behavior and Human Decision Processes 52 276ndash91

31

as principally concerned with rational analysis from which emotions are a dangerous distraction

This narrative seemed particularly strong in the accounts of less experienced traders Although as

we have seen the mask would often slip as they discussed their work Some traderslsquo accounts

were clearly colored by a desire to conform to this mode of self-presentation In consequence it is

possible that in our interviews and during data analysis we were at times unable to distinguish

effectively between defensive denial of emotion and effective regulation of emotion This would

be another avenue for future research

To conclude we know that emotions are a rich source of experience in everyday life but

at the same time in work contexts they can be a source of vulnerability a wayward influence over

judgment and a source of disturbance to process The more ―rational-economic such

environments are the more likely we are to hold such beliefs (Nicholson 2000) Our research

illustrates that this position is false or at best short-sighted In the hyper-rational world of

trading in financial markets we did find some evidence that emotions disturbed performance but

mostly among the inexperienced and un-reflective traders The best traders are able to regulate

emotions effectively and incorporate relevant emotions as information ndash signals or a kind of

radar that contain information about risks what is going on in the minds of others and the weight

and relevance to be accorded to onelsquos own past experience

32

REFERENCES

Bargh J A Chen M amp Burrows L (1996) Automaticity of social behavior Direct effects of

trait construct and stereotype activation on action Journal of Personality and Social

Psychology 71 230-244

Baumeister R F Bratslavsky E Muraven M amp Tice D M (1998) Ego depletion Is the

active self a limited resource Journal of Personality and Social Psychology 74 1252-

1265

Bechara A Damasio A Tranel D amp Damasio A R (1997) Deciding advantageously before

knowing the advantageous strategy Science 275 1293-1295

Bower G H (1981) Mood and memory American Psychologist 36 129 ndash 148

Bower G H (1991) Mood congruity of social judgments In J P Forgas (Ed) Emotion and

social judgments (pp 31ndash53) Oxford Pergamon Press

Braun V amp Clarke V (2006) Using thematic analysis in psychology Qualitative Research in

Psychology 3(2) 77-101

Buck R (1999) The biological affects a typology Psychological Reveiw 106 301-336

Damasio A R (1994) Descartes‟ error Emotion reason and the human brain New York

Putnam

Dane E amp Pratt M G (2007) Exploring intuition and its role in managerial decision making

The Academy of Management Review 32 33-54

De Bondt W Palm F amp Wolff C (2004) Introduction to the special issue on behavioral

finance Journal of Empirical Finance 11 423-427

Dreyfus H amp Dreyfus S (2005) Expertise in real world contexts Organization Studies 26

779-792

Epstein S Pacini R Denes-Raj V amp Heier H (1996) Individual differences in intuitive-

experiential and analytical-rational thinking styles Journal of Personality and Social

Psychology 71 390-405

Ericsson K A Krampe R T amp Tesch-Roemer C (1993) The role of deliberate practice in the

acquisition of expert performance Psychological Review 100 363-406

Ericsson K A (2006) An introduction to the Cambridge Handbook of Expertise and Expert

Performance its development organization and content In K A Ericsson amp N Charness

amp P J Feltovich amp R R Hoffman (Eds) The Cambridge Handbook of Expertise and

Expert Performance 1st ed 3-20 Cambridge Cambridge University Press

Fama E F (1991) Efficient Capital Markets II The Journal of Finance 46 1575-1617

Fama E F (1998) Market efficiency long-term returns and behavioral finance Journal of

Financial Economics Vol 49 283-306

Fenton-OCreevy M Nicholson N Soane E amp Willman P (2005) Traders Risks Decisions

and Management in Financial Markets Oxford Oxford University Press

Finucane M L Alhakami A Slovic P amp Johnson S M (2000) The affect heuristic in

judgments of risks and benefits Journal of Behavioral Decision Making 13(1) 1-17

Forgas JP amp George JM (2001) Affective influences on judgments and behavior in

organizations An information processing perspective Organizational Behavior and

Human Decision Processes 86(1) 3-34

Grandey AA (2000) Emotion Regulation in the Workplace A new way to conceptualize

Emotional Labor Journal of Occupational Health Psychology 5(1) 95-110

33

Grandey A A (2003) When the show must go on surface acting and deep acting as

determinants of emotional exhaustion and peer-rated service delivery Academy of

Management Journal 46 86-96

Gray JA (1999) Cognition emotion conscious experience and the brain In T Dalgleish and

MJ Power (Eds) Handbook of Cognition and Emotion (pp83-102) Chichester England

Wiley

Gross J (2002) Emotion regulation affective cognitive and social consequences

Psychophysiology 39 281

Gross J J amp John O P (2003) Individual differences in two emotion regulation processes

Implications for affect relationships and well-being Journal of Personality and Social

Psychology 85(2) 348-362

Gross J J amp Thompson R A (2007) Emotion regulation Conceptual foundations In J J

Gross (Ed) Handbook of emotion regulation New York NY Guilford Press

Isen A M Shalker T E Clark M amp Karp L (1978) Affect accessibility of material in

memory and behavior A cognitive loop Journal of Personality and Social Psychology

36 1-12

Johnson E amp Tversky A (1983) Affect generalization and the perception of risk Journal of

Personality and Social Psychology 45(1) 20-31

Kavanaugh D amp Bower G (1985) Mood and self-efficacy Impact of job and sadness on

perceived capabilities Cognitive Therapy and Research 9 507-525

Klein G A Calderwood R amp Clinton Cirocco A (1986) Rapid decision-making on the

fireground Human Factors and Ergonomics Society 30th Annual Meeting Vol 1 576-

580

Knorr-Cetina K amp Brugger U (2002) Traders Engagement with Markets A Postsocial

Relationship Theory Culture and Society 19(5-6) 161-185

Labouvie-Vief G (2003) Dynamic integration Affect cognition and the self in adulthood

Current Directions in Psychological Science 12 201-206

Lerner J S amp Keltner D (2001) Fear anger and risk Journal of Personality and Social

Psychology 81(1) 146-159

Lerner J S Small D A amp Loewenstein G (2004) Heart strings and purse strings Carryover

effects of emotions on economic decisions Psychological Science 15(5) 337-341

Lo A Repin D amp Steenbarger B (2005) Fear and greed in financial markets A clinical study

of day traders American Economic Review 95 352-359

Lo A W amp Repin D V (2002) The Psychophysiology of Real-Time Financial Risk

Processing Journal of Cognitive Neuroscience 14 323-339

MacKenzie D (2006) An Engine Not A Camera How Financial Models Shape Markets

Cambridge Mass MIT Press

Mayer JD amp Hanson A (1995) Mood-congruent judgment over time Personality and Social

Psychology Bulletin 21 237-244

Mayer JD DiPaolo M and Salovey P (1990) Perceiving affective content in ambiguous

visual stimuli a component of emotional intelligence Journal of Personality Assessment

54 772-781

Miller G (2003) The cognitive revolution a historical perspective Trends in Cognitive Science

7 141

Muraven M amp Baumeister R F (2000) Self-regulation and depletion of limited resources

Does self-control resemble a muscle Psychological Bulletin 126 247-259

Nicholson N (2000) Managing the Human Animal London ThomsonTexere

34

Peterson R L (2007) Affect and financial decision-making How neuroscience can inform

market participants The Journal of Behavioral Finance 8(2) 70-78

Pham M T (2004) The logic of feeling Journal of Consumer Psychology 14 360-369

Phelps E A (2006) Emotion and cognition Insights from studies of the human amygdala

Annual Review of Psychology 57 27-53

Sayer A (1997) Essentialism social constructionism and beyond The Sociological Review 45

453-487

Shapira Z amp Venezia I (2001) Patterns of behavior of professionally managed and

independent investors Journal of Banking and Finance 25 1573ndash1587

Schunk D amp Betsch C (2006) Explaining the heterogeneity in utility functions by individual

differences in decision modes Journal of Economic Psychology 27 386-401

Schwager J D (1993) Market Wizards Interviews with Top Traders New York Collins

Schwarz N amp Clore G L (1983) Mood misattribution and judgments of well-being

Informative and directive functions of affective states Journal of Personality and Social

Psychology 45 513-523

Seo M G Barrett L F amp Bartunek J M (2004) The role of affective experience in work

motivation Academy of Management Review 29 423-439

Seo M G amp Barrett L F (2007) Being emotional during decision makingmdashgood or bad An

empirical investigation The Academy of Management Journal 50 923-940

Shefrin H (2000) Beyond Greed and Fear Understanding Behavioral Finance and the

Psychology of Investing Boston MA Harvard Business School Press

Stokes A F Kemper K amp Kite K (1997) Aeronautical decision making cue recognition and

expertise under time pressure In C E Zsambok amp G Klein (Eds) Naturalistic Decision

Making pp 183-196 Mahwah NJ Erlbaum

Tamir M (2005) Dont worry be happy Neuroticism trait-consistent affect regulation

and performance Journal of Personality and Social Psychology 89 (3) 449 ndash

461

Thaler R H (1985) Mental accounting and consumer choice Marketing Science 4(3) 199-214

Thaler R H (1993) Advances In Behavioral Finance New York Russel Sage Foundation

Thaler R H (1999) Mental accounting matters Journal of Behavioral Decision Making 12(3)

183-206

Tiedens L amp Linton S (2001) Judgment under emotional certainty and uncertainty the effects

of specific emotions on information processing Journal of Personality and Social

Psychology 81(6) 973-988

Todd P M amp Gigerenzer G (2007) Environments that make us smart Ecological rationality

Current Directions in Psychological Science 16 167-171

Totterdell P Briner R B Parkinson B amp Reynolds S (1996) Fingerprinting time series

dynamic patterns in self-report and performance measures uncovered by a graphical non-

linear method British Journal of Psychology 87(1) 43-60

Weber M amp Welfens F (2008) Splitting the Disposition Effect Asymmetric Reactions

Towards bdquoSelling winners‟ and bdquoHolding Losers‟ Working Paper University of

Mannheim

Wright WF amp Bower GH (1992) Mood effects on subjective probability assessment

Organizational Behavior and Human Decision Processes 52 276ndash91

32

REFERENCES

Bargh J A Chen M amp Burrows L (1996) Automaticity of social behavior Direct effects of

trait construct and stereotype activation on action Journal of Personality and Social

Psychology 71 230-244

Baumeister R F Bratslavsky E Muraven M amp Tice D M (1998) Ego depletion Is the

active self a limited resource Journal of Personality and Social Psychology 74 1252-

1265

Bechara A Damasio A Tranel D amp Damasio A R (1997) Deciding advantageously before

knowing the advantageous strategy Science 275 1293-1295

Bower G H (1981) Mood and memory American Psychologist 36 129 ndash 148

Bower G H (1991) Mood congruity of social judgments In J P Forgas (Ed) Emotion and

social judgments (pp 31ndash53) Oxford Pergamon Press

Braun V amp Clarke V (2006) Using thematic analysis in psychology Qualitative Research in

Psychology 3(2) 77-101

Buck R (1999) The biological affects a typology Psychological Reveiw 106 301-336

Damasio A R (1994) Descartes‟ error Emotion reason and the human brain New York

Putnam

Dane E amp Pratt M G (2007) Exploring intuition and its role in managerial decision making

The Academy of Management Review 32 33-54

De Bondt W Palm F amp Wolff C (2004) Introduction to the special issue on behavioral

finance Journal of Empirical Finance 11 423-427

Dreyfus H amp Dreyfus S (2005) Expertise in real world contexts Organization Studies 26

779-792

Epstein S Pacini R Denes-Raj V amp Heier H (1996) Individual differences in intuitive-

experiential and analytical-rational thinking styles Journal of Personality and Social

Psychology 71 390-405

Ericsson K A Krampe R T amp Tesch-Roemer C (1993) The role of deliberate practice in the

acquisition of expert performance Psychological Review 100 363-406

Ericsson K A (2006) An introduction to the Cambridge Handbook of Expertise and Expert

Performance its development organization and content In K A Ericsson amp N Charness

amp P J Feltovich amp R R Hoffman (Eds) The Cambridge Handbook of Expertise and

Expert Performance 1st ed 3-20 Cambridge Cambridge University Press

Fama E F (1991) Efficient Capital Markets II The Journal of Finance 46 1575-1617

Fama E F (1998) Market efficiency long-term returns and behavioral finance Journal of

Financial Economics Vol 49 283-306

Fenton-OCreevy M Nicholson N Soane E amp Willman P (2005) Traders Risks Decisions

and Management in Financial Markets Oxford Oxford University Press

Finucane M L Alhakami A Slovic P amp Johnson S M (2000) The affect heuristic in

judgments of risks and benefits Journal of Behavioral Decision Making 13(1) 1-17

Forgas JP amp George JM (2001) Affective influences on judgments and behavior in

organizations An information processing perspective Organizational Behavior and

Human Decision Processes 86(1) 3-34

Grandey AA (2000) Emotion Regulation in the Workplace A new way to conceptualize

Emotional Labor Journal of Occupational Health Psychology 5(1) 95-110

33

Grandey A A (2003) When the show must go on surface acting and deep acting as

determinants of emotional exhaustion and peer-rated service delivery Academy of

Management Journal 46 86-96

Gray JA (1999) Cognition emotion conscious experience and the brain In T Dalgleish and

MJ Power (Eds) Handbook of Cognition and Emotion (pp83-102) Chichester England

Wiley

Gross J (2002) Emotion regulation affective cognitive and social consequences

Psychophysiology 39 281

Gross J J amp John O P (2003) Individual differences in two emotion regulation processes

Implications for affect relationships and well-being Journal of Personality and Social

Psychology 85(2) 348-362

Gross J J amp Thompson R A (2007) Emotion regulation Conceptual foundations In J J

Gross (Ed) Handbook of emotion regulation New York NY Guilford Press

Isen A M Shalker T E Clark M amp Karp L (1978) Affect accessibility of material in

memory and behavior A cognitive loop Journal of Personality and Social Psychology

36 1-12

Johnson E amp Tversky A (1983) Affect generalization and the perception of risk Journal of

Personality and Social Psychology 45(1) 20-31

Kavanaugh D amp Bower G (1985) Mood and self-efficacy Impact of job and sadness on

perceived capabilities Cognitive Therapy and Research 9 507-525

Klein G A Calderwood R amp Clinton Cirocco A (1986) Rapid decision-making on the

fireground Human Factors and Ergonomics Society 30th Annual Meeting Vol 1 576-

580

Knorr-Cetina K amp Brugger U (2002) Traders Engagement with Markets A Postsocial

Relationship Theory Culture and Society 19(5-6) 161-185

Labouvie-Vief G (2003) Dynamic integration Affect cognition and the self in adulthood

Current Directions in Psychological Science 12 201-206

Lerner J S amp Keltner D (2001) Fear anger and risk Journal of Personality and Social

Psychology 81(1) 146-159

Lerner J S Small D A amp Loewenstein G (2004) Heart strings and purse strings Carryover

effects of emotions on economic decisions Psychological Science 15(5) 337-341

Lo A Repin D amp Steenbarger B (2005) Fear and greed in financial markets A clinical study

of day traders American Economic Review 95 352-359

Lo A W amp Repin D V (2002) The Psychophysiology of Real-Time Financial Risk

Processing Journal of Cognitive Neuroscience 14 323-339

MacKenzie D (2006) An Engine Not A Camera How Financial Models Shape Markets

Cambridge Mass MIT Press

Mayer JD amp Hanson A (1995) Mood-congruent judgment over time Personality and Social

Psychology Bulletin 21 237-244

Mayer JD DiPaolo M and Salovey P (1990) Perceiving affective content in ambiguous

visual stimuli a component of emotional intelligence Journal of Personality Assessment

54 772-781

Miller G (2003) The cognitive revolution a historical perspective Trends in Cognitive Science

7 141

Muraven M amp Baumeister R F (2000) Self-regulation and depletion of limited resources

Does self-control resemble a muscle Psychological Bulletin 126 247-259

Nicholson N (2000) Managing the Human Animal London ThomsonTexere

34

Peterson R L (2007) Affect and financial decision-making How neuroscience can inform

market participants The Journal of Behavioral Finance 8(2) 70-78

Pham M T (2004) The logic of feeling Journal of Consumer Psychology 14 360-369

Phelps E A (2006) Emotion and cognition Insights from studies of the human amygdala

Annual Review of Psychology 57 27-53

Sayer A (1997) Essentialism social constructionism and beyond The Sociological Review 45

453-487

Shapira Z amp Venezia I (2001) Patterns of behavior of professionally managed and

independent investors Journal of Banking and Finance 25 1573ndash1587

Schunk D amp Betsch C (2006) Explaining the heterogeneity in utility functions by individual

differences in decision modes Journal of Economic Psychology 27 386-401

Schwager J D (1993) Market Wizards Interviews with Top Traders New York Collins

Schwarz N amp Clore G L (1983) Mood misattribution and judgments of well-being

Informative and directive functions of affective states Journal of Personality and Social

Psychology 45 513-523

Seo M G Barrett L F amp Bartunek J M (2004) The role of affective experience in work

motivation Academy of Management Review 29 423-439

Seo M G amp Barrett L F (2007) Being emotional during decision makingmdashgood or bad An

empirical investigation The Academy of Management Journal 50 923-940

Shefrin H (2000) Beyond Greed and Fear Understanding Behavioral Finance and the

Psychology of Investing Boston MA Harvard Business School Press

Stokes A F Kemper K amp Kite K (1997) Aeronautical decision making cue recognition and

expertise under time pressure In C E Zsambok amp G Klein (Eds) Naturalistic Decision

Making pp 183-196 Mahwah NJ Erlbaum

Tamir M (2005) Dont worry be happy Neuroticism trait-consistent affect regulation

and performance Journal of Personality and Social Psychology 89 (3) 449 ndash

461

Thaler R H (1985) Mental accounting and consumer choice Marketing Science 4(3) 199-214

Thaler R H (1993) Advances In Behavioral Finance New York Russel Sage Foundation

Thaler R H (1999) Mental accounting matters Journal of Behavioral Decision Making 12(3)

183-206

Tiedens L amp Linton S (2001) Judgment under emotional certainty and uncertainty the effects

of specific emotions on information processing Journal of Personality and Social

Psychology 81(6) 973-988

Todd P M amp Gigerenzer G (2007) Environments that make us smart Ecological rationality

Current Directions in Psychological Science 16 167-171

Totterdell P Briner R B Parkinson B amp Reynolds S (1996) Fingerprinting time series

dynamic patterns in self-report and performance measures uncovered by a graphical non-

linear method British Journal of Psychology 87(1) 43-60

Weber M amp Welfens F (2008) Splitting the Disposition Effect Asymmetric Reactions

Towards bdquoSelling winners‟ and bdquoHolding Losers‟ Working Paper University of

Mannheim

Wright WF amp Bower GH (1992) Mood effects on subjective probability assessment

Organizational Behavior and Human Decision Processes 52 276ndash91

33

Grandey A A (2003) When the show must go on surface acting and deep acting as

determinants of emotional exhaustion and peer-rated service delivery Academy of

Management Journal 46 86-96

Gray JA (1999) Cognition emotion conscious experience and the brain In T Dalgleish and

MJ Power (Eds) Handbook of Cognition and Emotion (pp83-102) Chichester England

Wiley

Gross J (2002) Emotion regulation affective cognitive and social consequences

Psychophysiology 39 281

Gross J J amp John O P (2003) Individual differences in two emotion regulation processes

Implications for affect relationships and well-being Journal of Personality and Social

Psychology 85(2) 348-362

Gross J J amp Thompson R A (2007) Emotion regulation Conceptual foundations In J J

Gross (Ed) Handbook of emotion regulation New York NY Guilford Press

Isen A M Shalker T E Clark M amp Karp L (1978) Affect accessibility of material in

memory and behavior A cognitive loop Journal of Personality and Social Psychology

36 1-12

Johnson E amp Tversky A (1983) Affect generalization and the perception of risk Journal of

Personality and Social Psychology 45(1) 20-31

Kavanaugh D amp Bower G (1985) Mood and self-efficacy Impact of job and sadness on

perceived capabilities Cognitive Therapy and Research 9 507-525

Klein G A Calderwood R amp Clinton Cirocco A (1986) Rapid decision-making on the

fireground Human Factors and Ergonomics Society 30th Annual Meeting Vol 1 576-

580

Knorr-Cetina K amp Brugger U (2002) Traders Engagement with Markets A Postsocial

Relationship Theory Culture and Society 19(5-6) 161-185

Labouvie-Vief G (2003) Dynamic integration Affect cognition and the self in adulthood

Current Directions in Psychological Science 12 201-206

Lerner J S amp Keltner D (2001) Fear anger and risk Journal of Personality and Social

Psychology 81(1) 146-159

Lerner J S Small D A amp Loewenstein G (2004) Heart strings and purse strings Carryover

effects of emotions on economic decisions Psychological Science 15(5) 337-341

Lo A Repin D amp Steenbarger B (2005) Fear and greed in financial markets A clinical study

of day traders American Economic Review 95 352-359

Lo A W amp Repin D V (2002) The Psychophysiology of Real-Time Financial Risk

Processing Journal of Cognitive Neuroscience 14 323-339

MacKenzie D (2006) An Engine Not A Camera How Financial Models Shape Markets

Cambridge Mass MIT Press

Mayer JD amp Hanson A (1995) Mood-congruent judgment over time Personality and Social

Psychology Bulletin 21 237-244

Mayer JD DiPaolo M and Salovey P (1990) Perceiving affective content in ambiguous

visual stimuli a component of emotional intelligence Journal of Personality Assessment

54 772-781

Miller G (2003) The cognitive revolution a historical perspective Trends in Cognitive Science

7 141

Muraven M amp Baumeister R F (2000) Self-regulation and depletion of limited resources

Does self-control resemble a muscle Psychological Bulletin 126 247-259

Nicholson N (2000) Managing the Human Animal London ThomsonTexere

34

Peterson R L (2007) Affect and financial decision-making How neuroscience can inform

market participants The Journal of Behavioral Finance 8(2) 70-78

Pham M T (2004) The logic of feeling Journal of Consumer Psychology 14 360-369

Phelps E A (2006) Emotion and cognition Insights from studies of the human amygdala

Annual Review of Psychology 57 27-53

Sayer A (1997) Essentialism social constructionism and beyond The Sociological Review 45

453-487

Shapira Z amp Venezia I (2001) Patterns of behavior of professionally managed and

independent investors Journal of Banking and Finance 25 1573ndash1587

Schunk D amp Betsch C (2006) Explaining the heterogeneity in utility functions by individual

differences in decision modes Journal of Economic Psychology 27 386-401

Schwager J D (1993) Market Wizards Interviews with Top Traders New York Collins

Schwarz N amp Clore G L (1983) Mood misattribution and judgments of well-being

Informative and directive functions of affective states Journal of Personality and Social

Psychology 45 513-523

Seo M G Barrett L F amp Bartunek J M (2004) The role of affective experience in work

motivation Academy of Management Review 29 423-439

Seo M G amp Barrett L F (2007) Being emotional during decision makingmdashgood or bad An

empirical investigation The Academy of Management Journal 50 923-940

Shefrin H (2000) Beyond Greed and Fear Understanding Behavioral Finance and the

Psychology of Investing Boston MA Harvard Business School Press

Stokes A F Kemper K amp Kite K (1997) Aeronautical decision making cue recognition and

expertise under time pressure In C E Zsambok amp G Klein (Eds) Naturalistic Decision

Making pp 183-196 Mahwah NJ Erlbaum

Tamir M (2005) Dont worry be happy Neuroticism trait-consistent affect regulation

and performance Journal of Personality and Social Psychology 89 (3) 449 ndash

461

Thaler R H (1985) Mental accounting and consumer choice Marketing Science 4(3) 199-214

Thaler R H (1993) Advances In Behavioral Finance New York Russel Sage Foundation

Thaler R H (1999) Mental accounting matters Journal of Behavioral Decision Making 12(3)

183-206

Tiedens L amp Linton S (2001) Judgment under emotional certainty and uncertainty the effects

of specific emotions on information processing Journal of Personality and Social

Psychology 81(6) 973-988

Todd P M amp Gigerenzer G (2007) Environments that make us smart Ecological rationality

Current Directions in Psychological Science 16 167-171

Totterdell P Briner R B Parkinson B amp Reynolds S (1996) Fingerprinting time series

dynamic patterns in self-report and performance measures uncovered by a graphical non-

linear method British Journal of Psychology 87(1) 43-60

Weber M amp Welfens F (2008) Splitting the Disposition Effect Asymmetric Reactions

Towards bdquoSelling winners‟ and bdquoHolding Losers‟ Working Paper University of

Mannheim

Wright WF amp Bower GH (1992) Mood effects on subjective probability assessment

Organizational Behavior and Human Decision Processes 52 276ndash91

34

Peterson R L (2007) Affect and financial decision-making How neuroscience can inform

market participants The Journal of Behavioral Finance 8(2) 70-78

Pham M T (2004) The logic of feeling Journal of Consumer Psychology 14 360-369

Phelps E A (2006) Emotion and cognition Insights from studies of the human amygdala

Annual Review of Psychology 57 27-53

Sayer A (1997) Essentialism social constructionism and beyond The Sociological Review 45

453-487

Shapira Z amp Venezia I (2001) Patterns of behavior of professionally managed and

independent investors Journal of Banking and Finance 25 1573ndash1587

Schunk D amp Betsch C (2006) Explaining the heterogeneity in utility functions by individual

differences in decision modes Journal of Economic Psychology 27 386-401

Schwager J D (1993) Market Wizards Interviews with Top Traders New York Collins

Schwarz N amp Clore G L (1983) Mood misattribution and judgments of well-being

Informative and directive functions of affective states Journal of Personality and Social

Psychology 45 513-523

Seo M G Barrett L F amp Bartunek J M (2004) The role of affective experience in work

motivation Academy of Management Review 29 423-439

Seo M G amp Barrett L F (2007) Being emotional during decision makingmdashgood or bad An

empirical investigation The Academy of Management Journal 50 923-940

Shefrin H (2000) Beyond Greed and Fear Understanding Behavioral Finance and the

Psychology of Investing Boston MA Harvard Business School Press

Stokes A F Kemper K amp Kite K (1997) Aeronautical decision making cue recognition and

expertise under time pressure In C E Zsambok amp G Klein (Eds) Naturalistic Decision

Making pp 183-196 Mahwah NJ Erlbaum

Tamir M (2005) Dont worry be happy Neuroticism trait-consistent affect regulation

and performance Journal of Personality and Social Psychology 89 (3) 449 ndash

461

Thaler R H (1985) Mental accounting and consumer choice Marketing Science 4(3) 199-214

Thaler R H (1993) Advances In Behavioral Finance New York Russel Sage Foundation

Thaler R H (1999) Mental accounting matters Journal of Behavioral Decision Making 12(3)

183-206

Tiedens L amp Linton S (2001) Judgment under emotional certainty and uncertainty the effects

of specific emotions on information processing Journal of Personality and Social

Psychology 81(6) 973-988

Todd P M amp Gigerenzer G (2007) Environments that make us smart Ecological rationality

Current Directions in Psychological Science 16 167-171

Totterdell P Briner R B Parkinson B amp Reynolds S (1996) Fingerprinting time series

dynamic patterns in self-report and performance measures uncovered by a graphical non-

linear method British Journal of Psychology 87(1) 43-60

Weber M amp Welfens F (2008) Splitting the Disposition Effect Asymmetric Reactions

Towards bdquoSelling winners‟ and bdquoHolding Losers‟ Working Paper University of

Mannheim

Wright WF amp Bower GH (1992) Mood effects on subjective probability assessment

Organizational Behavior and Human Decision Processes 52 276ndash91

35

TABLE 1 Summary of key findings and supporting evidence

Theme Nature of evidence Strength of evidence

Detrimental effect of non-

relevant emotions

Mood swings induced by

prior trading outcomes are a

significant (detrimental)

factor in tradersrsquo decision-

making

The majority of interviewees stressed

the importance and difficulty of

managing their emotions and mood

following large gains or losses A

minority claimed to have no

difficulty at all These seemed to fall

into three groups A small number

who consistently claimed to be

constitutionally unemotional a larger

group of (mostly inexperienced)

traders who seemed concerned to

present themselves as adhering to an

ideal type of the unemotional traderlsquo

but talked at times in ways which

undermined this self presentation

and more senior traders who

presented a narrative of overcoming

the influence of mood on their

decision-making through hard won

experience

The data shown in the results section

are representative of the range of

emotional expression

Strong

Emotion regulation and

performance

There are marked differences

in emotion regulation

strategies between

inexperienced traders

experienced low performing

traders and experienced high

performing traders

Clear differences in description of

emotion regulation strategies

emerged between novice traders

experienced low performers and

experienced high performers There

was a high level of agreement about

these differences between different

authors coding separately and there

were few counter examples

Strong

Managers and emotion

regulation

Trader managers play an

important role as regulators

of tradersrsquo emotions

Not all managers in our sample saw

themselves as having a role in

managing traderslsquo emotions

However stories about the role

managers played in managing

traderslsquo emotion were a frequent

component of traderslsquo and managerslsquo

accounts of emotions in trading

Moderate

36

There were no specific counter

examples although not all managers

talked about their role in managing

emotions

Intuition

Affectively cued intuitions

play an important role in

traders decision-making

Traders talk often contained

references to the use of intuition

Their language in relation to the use

of intuition often had a visceral

component or related to feelings

They talked of gut feellsquo having a

nose forlsquo itlsquos like having

whiskerslsquo it just felt rightlsquo the

risks felt wronglsquo There was

considerable variation in what

individual traders claimed about their

personal reliance on intuition with a

roughly even split between those

who claimed to rely on intuition a

great deal and those who claimed to

use it little or not at all However

nearly all felt it to be an important

element of decision making for many

traders Opinions also seemed split

between those who felt intuition and

associated feelings to be a valuable

aid and those who felt them to lead

to bad decisions

The data shown in the results section

are representative of the available

range

Strong

Intuition and performance

Differences among

experienced traders between

low and high performers in

lsquocritical engagement with

intuitionsrsquo

Experienced high performers were

no more or less likely to report

relying on intuition than experienced

low performers However

experienced high performers were

more likely to report reflecting

critically about the origins of their

intuitions and to report bringing

them together with other more

objective sources of evidence There

was reasonable agreement among

authors coding separately There

were a few counter examples

Moderate

37

Empathy

Self-monitoring of emotion as

a basis for understanding and

predicting emotions of other

market actors can be a factor

in traders decision-making

Five traders (of 118) explicitly and

spontaneously described using their

own emotions as a source of

information about the likely

emotional state of other market

actors There were no specific

counter examples however these

data were emergent so there were

only a few examples of empathy

Sporadic emergent

36

There were no specific counter

examples although not all managers

talked about their role in managing

emotions

Intuition

Affectively cued intuitions

play an important role in

traders decision-making

Traders talk often contained

references to the use of intuition

Their language in relation to the use

of intuition often had a visceral

component or related to feelings

They talked of gut feellsquo having a

nose forlsquo itlsquos like having

whiskerslsquo it just felt rightlsquo the

risks felt wronglsquo There was

considerable variation in what

individual traders claimed about their

personal reliance on intuition with a

roughly even split between those

who claimed to rely on intuition a

great deal and those who claimed to

use it little or not at all However

nearly all felt it to be an important

element of decision making for many

traders Opinions also seemed split

between those who felt intuition and

associated feelings to be a valuable

aid and those who felt them to lead

to bad decisions

The data shown in the results section

are representative of the available

range

Strong

Intuition and performance

Differences among

experienced traders between

low and high performers in

lsquocritical engagement with

intuitionsrsquo

Experienced high performers were

no more or less likely to report

relying on intuition than experienced

low performers However

experienced high performers were

more likely to report reflecting

critically about the origins of their

intuitions and to report bringing

them together with other more

objective sources of evidence There

was reasonable agreement among

authors coding separately There

were a few counter examples

Moderate

37

Empathy

Self-monitoring of emotion as

a basis for understanding and

predicting emotions of other

market actors can be a factor

in traders decision-making

Five traders (of 118) explicitly and

spontaneously described using their

own emotions as a source of

information about the likely

emotional state of other market

actors There were no specific

counter examples however these

data were emergent so there were

only a few examples of empathy

Sporadic emergent

37

Empathy

Self-monitoring of emotion as

a basis for understanding and

predicting emotions of other

market actors can be a factor

in traders decision-making

Five traders (of 118) explicitly and

spontaneously described using their

own emotions as a source of

information about the likely

emotional state of other market

actors There were no specific

counter examples however these

data were emergent so there were

only a few examples of empathy

Sporadic emergent